Hobbits are smaller, tend to be curly-haired, dress 'chiefly in green and yellow', have hairy feet with thick soles, and live in hobbit-holes. Dwarves are slightly bigger, usually bearded, and live in mountains. Dwarves are miners and stone-workers and they like gold. Hobbits like eating and smoking pipeleaf. Dwarves are also much more war-like than hobbits - dwarves craft weapons and armour while hobbits don't involve themselves in war. Hobbits are also much stealthier that dwarves and can move about quite quietly and avoid detection.
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A dwarf is a person of short stature, defined as a medical condition that results in a height of 4'10" or shorter. A gnome is a small mythical creature, supposed to be a gaurdian of mines, quarries, etc.
Gnomes also have hats. Dwarves do not.
Gnomes were subterranean dwellers of ambiguous physical description until Disney's Snow White came out in 1937. After that, the physical appearance was modelled after the seven dwarfs. Gnomes were synonymous with goblins in European folklore (George MacDonald's tales for children in the 19th Century). Hobbits are of J.R.R. Tolkien's creation (The Hobbit, The Lord of the Rings) and were physically different in appearance (as of the first edition of The Hobbit in 1937) . Gnomes are public domain. Hobbits are copyrighted Intellectual Property of the Tolkien Estate. Gnomes are now commonly garden ornaments. Hobbits are multi-million dollar movie stars.