'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 < or = 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 xc 0.3, which is coupled to a structural phase transition from orthorhombic (0 < x < or 0.1) to rhombohedral R3c structure (0.33 < or = x < or = 0.8). An increase of the Curie temperature for the Rc 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.