The announcement is a coup for the British film industry and confirms the belief that Hollywood is being lured back to Britain on the back of the new tax incentives introduced by Gordon Brown.

The Lion, The Witch and The Wardrobe was shot in New Zealand — which has established itself as a popular, low-cost filming location over the past few years.

Prince Caspian’s backers had considered New Zealand and the Republic of Ireland as alternative locations for the film, although the story is set initially in wartime Britain, before the four Pevensie children return to Narnia a thousand years after the events in The Lion, The Witch and The Wardrobe.

Mr Bird, a Briton, said that the US media giant was determined to produce in Britain as part of its policy of localising its image by basing productions away from America.

However, it is understood that the tax breaks available to overseas film-makers played an important role in the decision.

Those familiar with the project said that the revised tax regime was an incentive for Disney and Philip Anschutz’s Walden Media, the film’s other backer, to come to Britain, helping to revive a sector that had been in crisis as a result of the uncertainty that surrounded the scrapping of the previous tax rules.

A formal announcement confirming the decision to film in the UK has yet to be made, but the studio has already formally committed to undertaking special effects in the UK, the scale of which is enough alone to ensure that the film is the first major film to qualify for the break.

Mr Bird prefaced his comments at Thursday’s Royal Television Society Dinner by saying: “I don’t think we’ve announced this yet.” Pinewood Shepperton, the company behind the Pinewood studio, declined to comment.

Prince Caspian is due to be released in May 2008, under the direction of Andrew Adamson, who directed the previous film. The producers will be confident of a hit after the strong worldwide box office performance of The Lion, The Witch and The Wardrobe last year.

The first Narnia film grossed $745 million worldwide, with a production budget estimated at $180 million — opening the door to a lucrative franchise on the scale of Warner Brothers’ Harry Potter series.

Film production investment in the UK tumbled by 30 per cent in 2005 to £568.8 million, but has begun to recover this year as sentiment improved ahead of changes in the tax rules. Gordon Brown confirmed in his Pre-Budget Report this week that these would be introduced on January 1.

In the first six months of the year, spending was up by 76 per cent to £486.3 million, helped by the shooting of Harry Potter and the Order of the Phoenix by Warner Brothers. However, activity levels remain well below the 2003 peak year, in which spending totalled £1.15 billion.

Mr Bird said that Disney, along with other international media conglomerates, had to learn to tailor its content to local markets if they were to expand credibly by producing outside the United States.

To this end, the entertainment group has also built a new version of the film set for Desperate Housewives in Buenos Aires to produce television episodes of the continuing drama for South America.

Camera, action

£486m: value of UK production activity in first half of 2006

70: number of films made in UK in first half of this year

£569m: value of UK production activity last year

124: number of films made last year

2004: 133 films (£812 million)

2003: 173 films (£1.158 billion)

Breakdown of UK production activity, first half 2006, (prior year in brackets)

Overseas: £306.7 million (£179.4 million)

Domestic: £98.5 million (£55.3 million)

Co-productions: £81.2 million (£41.3 million)

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