'Colossal magnetoresistance' in perovskite manganites such as La0.7Ca0.3MnO3 (LCMO), is caused by the interplay of ferro-paramagnetic, metal-insulator and structural phase transitions. Moreover, different electronic phases can coexist on a very fine scale resulting in percolative electron transport. Here we report on (LCMO)(1-x):(MgO)(x) (0 < x less than or equal to 0.8) epitaxial nano-composite films in which the structure and magnetotransport properties of the manganite nanoclusters can be tuned by the tensile stress originating from the MgO second phase. With increasing x, the lattice of LCMO was found to expand, yielding a bulk tensile strain. The largest colossal magnetoresistance of 10(5)% was observed at the percolation threshold in the conductivity at x(c) approximate to 0.3, which is coupled to a structural phase transition from orthorhombic (0 < x less than or equal to 0.1) to rhombohedral R (3) over barc structure (0.33 less than or equal to x less than or equal to 0.8). An increase of the Curie temperature for the R (3) over barc phase was observed. These results may provide a general method for controlling the magnetotransport properties of manganite-based composite films by appropriate choice of the second phase.