Monday evening Hurricane Katrina weakened to a tropical storm, with winds of 105 km/h, and was moving northward from Mississippi.

But Monday morning it caused major flooding in New Orleans and other parts of the Gulf Coast, and it could be the most expensive hurricane in American history with damage estimates approaching $26 billion US.

Cars sit idle on flooded streets in downtown New Orleans after Hurricane Katrina came ashore on Monday, Aug. 29, 2005. (AP Photo/Dave Martin)

Pat Sullivan, the fire chief for Gulfport, Miss., said: "Let me tell you something folks: I've been out there. It's complete devastation."

An untold number of people were feared dead in flooded neighborhoods, many of which could not be reached by rescuers because of high water.

"Some of them, it was their last night on earth," Terry Ebbert, chief of homeland security for New Orleans, said of people who ignored orders to evacuate the city of 480,000 over the weekend. "That's a hard way to learn a lesson."

Katrina hit the Gulf Coast at daybreak Monday with winds above 230 km/h and blinding rain, submerging entire neighborhoods up to the rooflines in New Orleans, hurling boats onto land and sending water pouring into Mississippi's strip of beachfront casinos.

The storm passed just to the east of New Orleans as it moved inland, sparing the Big Easy its full fury and the massive flood damage that forecasters had feared.

But there was destruction everywhere along the Gulf Coast, including an estimated 40,000 homes flooded in St. Bernard Parish just east of New Orleans.

Katrina knocked out power to more than three-quarters of a million people from Louisiana to the Florida's Panhandle, and authorities said it could be two months before electricity is restored to everyone. Ten major hospitals in New Orleans were running on emergency backup power.

Katrina recorded a storm surge of more than six metres in Mississippi, where windows of a major hospital were blown out and billboards were ripped to shreds. In some areas, authorities pulled stranded homeowners from roofs or rescued them from attics.

In Alabama, exploding transformers lit up the early morning sky and muddy, two metre waves engulfed stately, million-dollar homes along Mobile Bay's normally tranquil waterfront.

An oil drilling platform under repair broke free of its mooring in Mobile Bay, Alabama, and slammed into a bridge. At least two oil rigs were adrift in the Gulf of Mexico.

Emergency officials had not been able to reach some of the hardest-hit areas to determine the number of injuries or deaths.

Officials across the region sent water rescue teams out and were ready to hand out ice, water and meals to hurricane-stricken residents.

Louisiana Governor Kathleen Blanco said her office had reports of as many 20 building collapses in New Orleans, and scores of residents stranded in attics or on rooftops.

Blanco said: "We pray that the loss of life is very limited, but we fear that is not the case."

On the south shore of Lake Ponchartrain, entire neighborhoods of one-story homes were flooded up to the rooflines. The Interstate 10 off-ramps nearby looked like boat ramps amid the whitecapped waves.

At New Orleans' Superdome, home to 9,000 storm refugees, the wind ripped pieces of metal from the roof, leaving two holes that let water drip in. People inside were moved out of the way. Others stayed and watched as sheets of metal flapped and rumbled loudly 19 stories above the floor. Outside, one of the three metre concrete clock pylons set up around the Superdome blew over.

By midday Monday, the storm had moved beyond New Orleans to Mississippi's coast, home to the state's floating casinos, where Katrina washed sailboats onto a coastal four-lane highway. The Beau Rivage Hotel and Casino, one of the premier gambling spots in Biloxi, had water on the first floor, and the governor said other casinos were flooded as well.

Katrina was the most powerful storm to affect Mississippi since Hurricane Camille came in as a Category 5 in 1969, killing 256 people in Louisiana and Mississippi.

The Gulfport fire chief said: "This is a devastating hit -- we've got boats that have gone into buildings, what you're looking at is Camille II."

In New Orleans' historic French Quarter of Napoleonic-era buildings with wrought-iron balconies, water pooled in the streets from the driving rain, but the area appeared to have escaped the catastrophic flooding that forecasters had predicted.

For years, forecasters have warned of the nightmare scenario a big storm could bring to New Orleans, a city that is 3 metres below sea level in spots and relies on a network of levees, canals and pumps to keep dry from the Mississippi River on one side, and Lake Pontchartrain on the other.

The fear was that flooding could overrun the levees and turn New Orleans into a toxic lake filled with chemicals and petroleum from refineries, as well as waste from ruined septic systems.

Crude oil futures spiked to more than $70 a barrel in Singapore for the first time Monday as Katrina targeted an area crucial to the U.S. energy infrastructure, but the price had slipped back to $68.95 by midday in Europe. The approaching storm forced the shutdown of an estimated 1 million barrels of refining capacity.

Calling it a once-in-a-lifetime storm, New Orleans Mayor Ray Nagin had ordered a mandatory evacuation over the weekend for the city's 480,000 residents, and he estimated about 80 percent left, as ordered.

President Bush pledged extensive assistance for hurricane victims Monday and urged those in areas affected to remain safe until the danger "from this devastating storm" passed. The U.S. government put into effect a massive emergency assistance program that included rushing baby formula, communications equipment, generators, water and ice into hard-hit areas.

Bush was expected to tap into the nation's emergency petroleum stockpiles to help refineries affected by the storm, administration officials said, adding that final details were being worked out.

The government's supply -- nearly 700 million barrels of oil stored in underground salt caverns along the Texas and Louisiana Gulf Coast -- was established to cushion oil markets during energy disruptions.

If Bush decides to tap the reserves, as he did in 2004 when Hurricane Ivan struck the Gulf of Mexico, it would not be designed to put downward pressure on gas prices but to give refineries in the area a temporary supply of crude oil to replace of interrupted shipments from tankers or offshore oil platforms affected by the storm.

New Orleans has not taken a direct hit from a hurricane since Betsy in 1965, when a three metre storm surge submerged parts of the city in more than two metres of water. Betsy, a Category 3 storm, was blamed for 74 deaths in Louisiana, Mississippi and Florida.

Katrina hit the southern tip of Florida as a much weaker storm last Thursday and was blamed for 11 deaths. It left streets and homes flooded and knocked out power to 1.45 million customers. It was the sixth hurricane to hit Florida in just over a year.