UPDATED WRITE-THRU – EXCLUSIVE: In what amounts to a dream come true for fans of Middle Earth, Peter Jackson has decided to direct two installments of The Hobbit, trusted sources are telling me. His deal is being negotiated right now with Warner Bros , New Line, and MGM. He will shortly take the reins over from Guillermo del Toro, after Jackson extricates himself from other project obligations that caused Jackson and manager Ken Kamins to initially deny he would direct. While Jackson’s camp has been tight-lipped, I’m told that the case is being made to MGM’s owners to loosen the purse strings and make the movies happen. The impetus for these talks is that Jackson will be the director of both of The Hobbit films, which will be shot back-to-back in his New Zealand backyard. The secret’s out.

Despite Jackson camp denials that directing was a consideration, there were signs for cautious optimism from the moment del Toro bowed out. More recently, there have been major clues. While several directors have angled for the job — the most recent rumors focused on David Yates and Jackson’s District 9 protege Neill Blomkamp — no offer was ever made. I think that’s because Jackson was figuring out if he wanted to direct two more films, and finish the saga he started with The Lord of the Rings. And then once he decided, Kamins had to make it possible. It became more evident this week: he, Fran Walsh and Philippa Boyens scheduled a trip to London the week of July 4, followed by a trip to Los Angeles the following week. They will meet the most impressive actors who’ve been put on tape by casting directors. Jackson, Walsh and Boyens wrote the scripts with del Toro, and they did the original trilogy together. But if they intended for someone else to direct, they would have made sure the filmmaker was part of the casting process.

This is quite a turn of events since del Toro surprised the industry by announcing on the Hobbit sounding board TheOneRing.net on Sunday, May 30 that he would not be directing. It was shocking, because del Toro interrupted his new deal to become a cornerstone director at Universal so that he could spend five years taking on The Hobbit, after being chosen over Sam Raimi by Jackson, MGM and New Line. After completing the writing of two scripts, del Toro sounded reticent days before, expressing concern about MGM’s financial situation. He left days later. Since the expectation is that somehow the film would get financed despite MGM’s woes, speculation was that perhaps del Toro didn’t see himself and his family living in New Zealand for the next several years required to make the films. This seemed more plausible, since Jackson said he expected to get the films into theaters for December 2012 and December, 2013.

Jackson seemed the obvious person to take his place as the director of the JRR Tolkien novel, particularly to keep those release dates on track. While he has been engaged with Steven Spielberg on the Tin Tin films, Jackson has been a creative partner with del Toro from the beginning. He certainly knows the terrain better than anyone alive, having shot three installments of The Lord of the Rings during a single production stint. Those three films grossed $2.9 billion worldwide and won a slew of Oscars. Though Kamins initially dismissed the possibility, Jackson opened the door a crack when he told a New Zealand daily he would consider it: “If that’s what I have to do to protect Warner Brothers’ investment, then obviously that’s one angle which I’ll explore,” Jackson said.

Numerous directors wanted the job, but hiring a star on Jackson’s level would have been difficult. Raimi, who is working on the Warner Bros/Legendary vidgame adaptation Warcraft and the Disney film The Great and Powerful Oz, was busy and would likely not return to a project for which he’d gotten passed over. Most of the other star directors like Alfonso Cuaron, Chris Nolan, Spielberg or Bryan Singer are busy on their own projects. In addition, it would be difficult to pay them properly, because of the amount of first dollar gross already committed to Jackson, the Tolkien estate, rights holder Saul Zaentz and Harvey Weinstein, who held the 5% gross stake he had in the original trilogy. That’s when Michael Eisner refused his request for Miramax to make the films with Jackson, and Weinstein gave the filmmaker a short window to find another home for the project. That window was almost closed when New Line founder Bob Shaye said yes to three films.

Jackson will have his deal sweetened, but he’s already completely invested in the process and there are built-in efficiencies. The films will use the soundstages and visual effects facilities that Jackson built with proceeds from the LOTR proceeds.

Pending a deal, the next step will be to discuss whether or not to shoot the films in 3D. That would beg a second discussion about transferring LOTR into 3D as well, a move that would give the trilogy a shot at another revenue cycle. These are all weighty discussions, but at least there are signs of forward motion, something that cannot be said for the other pictures that the debt-choked MGM has frozen while it figures out its future.