"Despite the various rumours and speculation surrounding this role, there has only ever been one Bilbo Baggins for us," Jackson said.
"There are a few times in your career when you come across an actor who you know was born to play a role, but that was the case as soon as I met Martin.
"He is intelligent, funny, surprising and brave -- exactly like Bilbo."
Freeman, 39, rose to prominence in the Ricky Gervais comedy "The Office" and has also featured in "The Hitchhiker's Guide to the Galaxy", "Love Actually" and "Shaun of the Dead".
The casting decision came as the New Zealand government scrambled to try to ensure "The Hobbit", which will begin filming in 3D next February, was shot in the country.
Prime Minister John Key flagged possible changes to industrial laws at the centre of a dispute between Jackson and the actors' union NZ Equity, saying he was hopeful the films would still be made in New Zealand.
"I don't think we should write off our chances of retaining the movies," he told national news agency NZPA.
"There's work to be done and the government hasn't given up trying to do its best to secure the movies," he added, saying he would meet with Warner Bros executives due to arrive next week to make a decision on locations.
The row over the 500 million US dollar project erupted over NZ Equity's demand that Jackson allow it to negotiate minimum standards for actors, which the director refused, saying it would set an unacceptable industry precedent.
It escalated when NZ Equity last month called for a global boycott of the production through international actors' unions, which was lifted this week.
Warner Bros said in a statement that the boycott had already disrupted its plans to shoot in New Zealand.
"The actions of these unions have caused us substantial damage and disruption and forced us to consider other filming locations for the first time," it said. "Alternative locations are still being considered."
New Zealand provided a stunning location for "The Lord of the Rings" and Jackson said Thursday that the country's three billion dollar (2.3 billion US) a year film industry would be devastated if "The Hobbit" moved elsewhere.
Producers have mentioned Scotland, Canada, Ireland, Australia and eastern Europe as possible alternative locations, along with the Leavesden Studios near London, where the "Harry Potter" movies were filmed.