He gave no details of what had prompted his decision.
The 27-year-old actor is best known for his role as Sean in the popular BBC soap opera.
Producers are now scrambling to find a replacement, with filming currently under way at studios in Wellington, the New Zealand capital.
Meanwhile, Sir Peter also revealed that Sir Ian Holm will reprise his role as the older Bilbo.
Martin Freeman of The Office has been cast as a younger Bilbo, in the prequel to the Oscar-winning Lord of the Rings trilogy.
Other stars returning include Sir Ian McKellen as Gandalf, Andy Serkis as Gollum, and Orlando Bloom as Legolas.
Elijah Wood is reprising his role as Frodo Baggins, even though the character does not appear in the book of The Hobbit, set 60 years before the trilogy.
A string of setbacks, including funding problems with MGM studios, the resignation of original director Guillermo Del Toro, and Sir Peter needing emergency surgery, led to some in the industry dubbing the production as "cursed".
The first film in the two-part prequel is due to reach cinemas in December 2012.
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