You can see the full details of WB worldwide distribution deal with The Hobbit in ED's article below. But Deadline have posted this update to that story..
I've learned that Warner Bros will, in fact, pay the entire cost of the two installments of The Hobbit, a price-tag that is expected to exceed $500 million. Now, the question will be which cast members from The Lord of the Rings come back for encores. I've heard talk of conversations with Ian McKellen, Andy Serkis and possibly Elijah Wood. I'd heard Orlando Bloom was also in talks before the holidays. Returning actors will need to be locked in shortly.
We already had word that McKellen and Serkis would return. And since both Gandalf and Gollum feature in the book it was no surprise. Then came the rumor that Bloom may be back and that was met with a mixed reaction. But although Legolas doesn't appear in The Hobbit its not too much of a stretch to have him pop up in Mirkwood or something since he would have certainly been around at the time. Frodo though, would not. At least not if the movies adhere to the source material's time scale. Frodo(if he was born at all?), would have only been an infant/child when Bilbo set off on his quest. I guess a bit of a shift in the years wouldn't hurt too much but its just not necessary. Why bother just to bring Wood back for what can only be a small cameo? Anyway, its not a certainty by any means. What do you folks think?
Update: Theonering.net have confirmed that Wood will indeed appear in The Hobbit..
As readers of “The Hobbit” know, the tale of “The Downfall of The Lord of the Rings” and “The Hobbit or There and Back Again,” are contained in the fictional “Red Book of Westmarch.” In Peter Jackson’s LOTR films, the books are shown on screen and written in by Bilbo and Frodo and handed off to Sam Gamgee. (Not explained on film are Sam’s progeny later having the book and being Wardens of the Westmarch — hence the book’s title.)
Apparently he will be featured in the opening sequence reading about Bilbo's adventures as we see them unfold.