Connolly - married to former Kiwi television-star-turned-sex-therapist Pamela Stephenson - is pleased at landing the job because it means he can go fishing.
"When Billy was in New Zealand filming The Last Samurai with Tom Cruise a few years back he got time to fish and he loved it," the source added.
"He says the country is 'trout heaven'. He seemed more excited at the prospect of going fishing again than he was about appearing in the movie."
Connolly joins an all-star cast that includes Sir Ian McKellen, Martin Freeman, Cate Blanchett, Ian Holm, Christopher Lee, Hugo Weaving, Elijah Wood, Orlando Bloom and Andy Serkis.
Hobbit director Jackson last month said he was eager to see Connolly in action. "With Billy stepping into this role, the cast of The Hobbit is now complete. We can't wait to see him on the battlefield," Jackson said.