Image Credit: Barry King/; Kristian Dowling/WireImage.comOver the last four years, there has scarcely been another project in Hollywood that has been more highly anticipated — and has weathered more back-room corporate wrangling — than The Hobbit. So when filmmaker Guillermo del Toro (Pan’s Labyrinth, Hellboy) announced today that he was dropping out of directing the two films planned for J.R.R. Tolkien’s literary preamble to The Lord of the Rings, the news served as both a shock to fans and yet another possible casualty in the sad ongoing saga of MGM Studios.

As Del Toro (pictured, right) and The Hobbit producer Peter Jackson (pictured, left) explained to LOTR fansite, the two Hobbit films are still slated for release in Dec. 2012 and Dec. 2013. And Del Toro is still collaborating on the screenplay with Jackson and his LOTR co-screenwriters Fran Walsh and Philippa Boyens. But why did Del Toro walk away from one of the most highly coveted director’s chairs in modern cinema? And who could possibly step in to replace him? (Read on for why it won’t be Peter Jackson.)

The answer to the first question may in part be found in the debt-soaked balance sheets at MGM, which co-owns the rights to a feature film version of The Hobbit with New Line Cinema, the studio that made the LOTR trilogy. Late last year, MGM officially went up for sale with a reported $3.7 billion in debt, a process that has dragged on for months and thrown the prospect of future projects at the venerable studio into question — including, for example, another James Bond film. Just last Friday, Del Toro told the press in a conference call promoting Splice (which he is exec producing) that the uncertainty surrounding MGM’s future means that The Hobbit has no official greenlight and cannot move forward. “We have been caught in a very tangled negotiation,” Del Toro said. “Now I have been on the project for nearly two years. We have designed all the creatures, the sets, the wardrobe, animatics and planned action sequences and we are very, very prepared for when it is finally triggered. We don’t know anything until the MGM situation is resolved.”

UPDATE: A source close to the production tells EW that MGM’s impending sale has had absolutely no impact on the status of The Hobbit, and stresses that Dec. 2010 has always been the target production start date and is not expected to change with Del Toro’s replacement. (The text of the preceding and following paragraphs have been altered to reflect this perspective.)

When Del Toro signed on to direct The Hobbit two years ago, he moved to New Zealand to work with Jackson, Walsh, and Boyens, knowing full well what signing on to direct two giant movies back-to-back would mean. “It’s about a half-a-decade of commitment,” he told EW in April 2008. “A huge endeavor.” Two years later, the production still is not underway, MGM’s financial future is in limbo, and several other of Del Toro’s commitments as a director and producer are hanging in the balance — including possible films of Frankenstein and Dr. Jekyll and Mr. Hyde. Del Toro apparently felt that the endeavor back into Middle Earth would have to proceed without him at the helm. Jackson’s manager Ken Kamins tells EW via e-mail that he approached Jackson on Saturday with his thinking and decision.

So who could take Del Toro’s place? Not Jackson. “As for Peter directing,” writes Kamins from New Zealand, “that’s not something he can consider at this time as he has other commitments to other projects. But make no mistake, Peter and Fran’s commitment to the franchise is total and will do everything necessary to protect the films and the investment made by New Line, [parent company] Warner Bros. and MGM.” (Studio reps have not responded to requests for comment.)

Kamins says execs from New Line and Warner Bros. will be meeting with him, Jackson and Walsh this week to hammer out who will take on the job of directing The Hobbit. And until the announcement is made, why not partake in some wild speculation? I’m personally intrigued by the idea of Del Toro’s old buddy Alfonso Cuarón taking the reigns; between Harry Potter and the Prisoner of Azkaban and Children of Men, he certainly knows how to pull off sweeping spectacle with deep feeling. But who do you think should take the reigns of The Hobbit? Sam Mendes? Tim Burton? Michel Gondry? Someone else? Or do you think Del Toro can never be replaced?

More on The Hobbit:

‘The Hobbit’: Production could begin in mid-’10

‘The Hobbit’: Hugo Weaving is in

‘The Hobbit’: Peter Jackson joins writing team

‘The Hobbit’: Guillermo del Toro will direct

‘The Hobbit’ a go: What to expect

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