An employment dispute between the makers of The Hobbit films and an actors' union could cause long-lasting damage to the country's reputation, Film New Zealand says.

Australian union Media, Entertainment and Arts Alliance (MEAA) said makers of The Hobbit had refused to enter into a union-negotiated agreement and advised members not to accept work on the feature film.

Hollywood stars such as Sir Ian McKellen, Cate Blanchett and Hugo Weaving - all reportedly taking part in the Lord of the Rings prequel - supported a boycott, the union said.

The Hobbit executive producer Sir Peter Jackson yesterday disputed the claims calling the union an "Australian bully-boy", and saying it had a clear agenda "based on money and power".

He warned that the dispute could lead to The Hobbit films being made in eastern Europe and the makers of other big-budget movies turning their backs on New Zealand

In a statement today, Film New Zealand chief executive Gisella Carr said long-term damage could be caused to the country's film-making.

"The Hobbit films are worth millions of dollars to New Zealand's economy and they represent hundreds of jobs - not just acting roles, but also crew and all suppliers to the film industry," she said.

"And should New Zealand lose The Hobbit because of this dispute, we could be not just losing these films, but also our ability to attract international film productions into the future."

The film business was intensely competitive and countries including the United Kingdom, Australia, Canada, the United States and those in Eastern Europe were eagerly waiting in the wings to pick up such valuable work, Ms Carr said.

"Other countries have everything to gain from a dispute in New Zealand. International productions can take their pick of where they film in the world, and everyone wants a picture like The Hobbit. It's a buyer's market."

But the Council of Trade Unions (CTU) said today it supported MEAA's stand.

CTU president Helen Kelly said Sir Peter was totally unjustified to describe the union assistance from Australia as "bullying" and that it was good to have international support for workers, including performers.

"The film industry gets very significant tax breaks from the Government and needs to address all industry issues including the problem of non-union contracts which provide no minimum guarantees of wages or working conditions, no residual payments and no cancellation payments in the event the performer's contract is cancelled."

Ms Kelly said discussions with the New Zealand Actors' Equity, which was in alliance with the MEAA, indicated there were a variety of lawful means which could be used to establish the minimum wage, working conditions and residuals for performers on the production.

"A copy of this advice has been provided to the lawyers for the producer but at this stage there is a refusal to negotiate," Ms Kelly said.

MEAA performers will meet in Auckland tomorrow night to assess the situation.

The setback is the latest to hit the movies, which have been in the pipeline for several years and are yet to get the green light.

Filming was originally scheduled to start last year but has been delayed until next year.