The Hellboy auteur was set to start shooting the fantasy film, based on J.R.R. Tolkien's first book, this summer (10), but the project has been thrown into jeopardy by the ongoing financial problems at MGM movie studio, which was put up for sale in 2009 after falling heavily into debt.
Last week (ends30May10), Del Toro revealed the highly-anticipated film is on hold and has been caught up in "tangled negotiations" over the future of MGM.
Now Del Toro has dealt the project another blow - he has walked away from the film, blaming the ongoing delays for his decision to quit.
In a statement, he says, "In light of ongoing delays in the setting of a start date for filming The Hobbit I am faced with the hardest decision of my life.
"After nearly two years of living, breathing and designing a world as rich as Tolkien's Middle Earth, I must, with great regret, take leave from helming these wonderful pictures.
"I've been privileged to work in one of the greatest countries on earth with some of the best people ever in our craft and my life will be forever changed. The blessings have been plenty, but the mounting pressures of conflicting schedules have overwhelmed the time slot originally allocated for the project."
Del Toro will remain involved in the project - he will stay on to work as a screenwriter.
Lord Of The Rings director Peter Jackson, who will produce two planned The Hobbit movies, reveals the extended time Del Toro would have to spend in New Zealand - where the project is to be filmed - was the real reason he stepped down.
Jackson tells fan website TheOneRing.net, "We feel very sad to see Guillermo leave The Hobbit, but he has kept us fully in the loop and we understand how the protracted development time on these two films, due to reasons beyond anyone's control - has compromised his commitment to other long term projects.
"The bottom line is that Guillermo just didn't feel he could commit six years to living in New Zealand, exclusively making these films, when his original commitment was for three years. Guillermo is one of the most remarkable creative spirits I've ever encountered and it has been a complete joy working with him."