The director is suing New Line Cinema for a greater share of the profits from the film version of Tolkien’s books which generated $6 billion (£3 billion) in sales.

Jackson, who recently became the highest-paid director yet with a £10 million deal to remake King Kong, believes that he has been hoodwinked out of income from merchandising and video and computer games sales from the trilogy..

He is suing over money from the first of the three films, which generated $870 million at box offices in 2001 as well as hundreds of millions more from sales of DVDs, computer games and merchandise such as rubber elf ears, hobbit pipes and ornamental swords. If he wins he will be entitled to more profits from the second and third films.

Jackson, a New Zealander, brought the case in Los Angeles with Fran Walsh, his creative and real-life partner, through their company Wingnut Films. It does not specify damages, but the amount is expected to run into millions.

Jackson and Ms Walsh make 19 allegations, among them that New Line improperly deducted costs relating to home video, used the wrong royalty rate to compute DVD sales, charged too much for subdistribution, did not pay for use of the film’s script and a song lyric written by Ms Walsh in an accompanying video game and incorrectly valued their cut from merchandise sales.

The pair also accuse New Line of forging pacts with other Time Warner divisions for licensing agreements rather than seeking the most lucrative deal on the open market.

They have enlisted Stanton “Larry” Stein, a high-flying Hollywood lawyer known for representing artists who believe that they have been short-changed by big studios. Mr Stein refused to comment, but Peter Nelson, from a separate law firm also employed by Wingnut, said: “We attempted to resolve our differences with New Line Cinema through the normal auditing process. That has proven unsatisfactory thus far.”

New Line said it did not comment on pending litigation.

The lawsuit sours an episode in Hollywood history that took on mythical proportions when the final Lord of the Rings instalment, Return of the King, topped $1 billion in worldwide box office receipts and won 11 Academy Awards last year, equalling the record held by Ben Hur and Titanic. The partnership between Jackson and New Line began when the studio, a division of Time Warner, took on the project after it had been declined by Walt Disney and funded all three Lord of the Rings films at a cost of more than $300 million.

Each went on to become a blockbuster, achieving $2.9 billion in global box office receipts, making The Lord of the Rings the second-most lucrative franchise in Hollywood history behind the Star Wars films. They were also hugely popular as DVDs, and analysts estimate that collectively they brought in at least as much money as was made at the cinema.

Lord of the Rings has generated one previous law suit. In August Saul Zaentz, a producer, made a claim in Los Angeles seeking almost $20 million in allegedly unpaid profits. He had held the rights to the Tolkien books since 1976 and licensed them to Mr Jackson.

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