New Zealand says only 50-50 chance of keeping 'Hobbit'

Key said the labor issues were of paramount importance.

"They are not coming here with a ransom note or trying to put a gun to our head," he said. "The commercial reality is that the actions of the union have encouraged them to look at other countries and other countries have better deals."

NO CHANGE TO FILM SUBSIDIES

The New Zealand prime minister ruled out increasing the country's subsidy program to sway studio executives.

"We don't want to be re-negotiating with every single production company that comes to New Zealand," said Key

Film subsidies are expected to run to about $50 million, and some union members had argued that Warner Bros. was using the industrial dispute -- which centered on working conditions -- to wrangle a better deal from the government.

The rising value of the New Zealand dollar has also been cited as a factor, with the currency trading about $0.75, around a third higher than when New Zealand was first investigated as a potential site for filming.

Reports have suggested that Warner Bros. is considering locations in England, Scotland, Ireland, Canada, Australia and eastern Europe.

The project has already suffered a series of delays including the resignation of director Guillermo de Toro, who quit in May as the uncertain financial future of movie studio partner MGM put a question mark over the project.

"The Hobbit" is based on the adventures of Bilbo Baggins, a hobbit who lives in the land of Middle-earth that is filled with wizards, elves and other fantasy creatures. Bilbo goes on a quest to find treasure guarded by a dragon.

The book, first published in 1937, is the precursor to the "Lord of the Rings" trilogy which also takes place in Middle-earth.