Origin of species (at least the hobbits)

[Son of Númenor]

This should answer your question:

It is plain indeed that in spite of later estrangement Hobbits are relatives of ours: far nearer to us than Elves, or even Dwarves. Of old they spoke the languages of Men, after their own fashion, and liked and disliked much the same things as Men did. But what exactly our relationship is can no longer be discovered. The beginning of Hobbits lies far back in the Elder Days that are now lost and forgotten. Only the Elves still preserve any records of that vanished time, and their traditions are concerned almost entirely with their own history, in which Men appear seldom and Hobbits are not mentioned at all. Yet it is clear that Hobbits had, in fact, lived quietly in Middle-earth for many long years before other folk became even aware of them (The Lord of the Rings, "Prologue", 2).

Hobbits are descended from Men. How they evolved into the little, reclusive people that they are is never made clear.

Edit: I cross-posted with you, Carnimírië. Nice find in the Letters.

[Gorwingel]

Basically the quotes that the others have provided tell you that we really don't know how hobbits came to be. Their beginnings are really a complete mystery. The elves didn't know about them because the kept to themselves, and their separation from the race of men happened at such a early time that their was not records of the occurance.

The Hobbits are, of course, really meant to be a branch of the specifically human race (not Elves or Dwarves)

Thank you for providing that quote because I have always been under the impression that their wasn't really a separation. I always thought that men started out individually, and hobbits started out individually, but it is just that they were so quiet that no one paid attention to them.

But I guess I was incorrect

[PaleStar]

The posts answer Gothmog's question but, just how did the hobbits come into being? Did Eru forsee the evil of Sauron and fashion these stout-hearted folks from Men? Was it one of the Valar, as it was with the Dwarves? Who was it?