The hurricane slammed into the heart of Louisiana's fishing and oil industry with 177 kph winds on Monday then faded as it moved inland, delivering only a glancing blow to New Orleans that raised hopes the city would escape the kind of catastrophic flooding brought by Katrina three years ago.

Overall, US emergency officials described a successful evacuation and shelter system in the Gulf Coast, a much different outcome from the lack of preparedness, devastation, and 1,600 deaths in Hurricane Katrina three years ago. There were three deaths among the more than 9,000 ill and elderly patients evacuated, officials said at a news conference.

Aircraft that were grounded due to high winds were to begin flying over stricken areas later on Monday to make the first damage assessments.

Fuel prices could spike because of the storm. The Energy Department reported that a dozen refineries are shut down, representing 28 per cent of the Gulf Coast capacity and approximately 12 per cent of US refining capacity. Another 10 refineries are operating at reduced levels.

Workers from 86 out of 171 oil rigs in the Gulf have been evacuated, and about 96 per cent of oil production and 82 per cent of natural gas production in the region has been temporarily shut down.

If found undamaged, drilling platforms could be back in operation quickly, officials said.

In New Orleans, wind-driven water sloshed over the top of the Industrial Canal's floodwall, but city officials and the Army Corps of Engineers said they expected the levees, still only partially rebuilt after Katrina, would hold. Flood protections along the canal broke with disastrous effect during Katrina, submerging St. Bernard Parish and the Lower Ninth Ward.

'We are cautiously optimistic and confident that we won't see catastrophic wall failure,' said Colonel Jeff Bedey, commander of the Corps' hurricane protection office.

The nearly 2 million people who left coastal Louisiana on a mandatory evacuation order watched TV coverage from shelters and hotel rooms hundreds of miles away.

While New Orleans wasn't submerged, there were scores of homes that suffered damage. In Terrebonne Parish, located in the south-east part of the state, several homes had torn roofs, but winds were still too fierce for officials to fan out and assess the damage.

Mr Keith Cologne of Chauvin, Louisiana, looked dejected after talking by telephone to a friend who didn't evacuate. 'They said it's bad, real bad. There are roofs lying all over. It's all gone,' said Mr Cologne, staying at a hotel in Alabama.

In New Orleans' Upper Ninth Ward, about half the streets closest to the canal were flooded with ankle- to knee-deep water as the road dipped and rose. Two small vessels had broken loose from their moorings in the canal and were resting against a wharf. There were no immediate reports of any damage to the canal.

New Orleans Mayor Ray Nagin said city officials wouldn't know until late afternoon if the vulnerable West Bank area of the city which lies to one side of the Mississippi River would stay dry.

Worries about the level of flood protection in an area where enhancements to the levees are years from completion were a key reason Mr Nagin was so insistent residents evacuate the city.

By mid afternoon on Monday, the rain had stopped in the French Quarter, the highest point in the city. The wind was breezy but not fierce, and some of the approximately 10,000 people who chose to defy warnings and stay behind began to emerge. But knowing that the levees surrounding the city could still be pressured by rising waters, no one was celebrating just yet.

The National Hurricane Centre in Miami said Gustav hit around 9.30am (9.30pm Singapore time) near Cocodrie, a low-lying community 116 kilometres south-west of New Orleans, as a Category 2 storm on a scale of 1 to 5. The storm weakened to a Category 1 later in the afternoon; at 4pm the sustained winds had fallen to 129 kph. Forecasters feared the storm would arrive as a devastating Category 4.

About 17 per cent of electric customers in Louisiana were without power, although the percentage could rise.

Houma, Morgan City and areas of Lafourche Parish were cited as places facing the greatest danger, and officials said they remained cautious.

It's 'much too early' to declare success, said Major General Don Riley, deputy commanding general of the Army Corps of Engineers.

'We would not be pounding our chests.' Maj Gen Riley said the New Orleans levee system held even though post-Katrina reconstruction is only 25 per cent complete. He said the Ninth Ward of New Orleans, wiped out in Katrina, experienced 'some overwash', but added the city pumps should be able to cope with the spillover.

The levee rebuilding will not be complete until 2011, Maj Gen Riley said.

Maj Gen Bill Etter, director of domestic operations for the National Guard, said 14,000 air and army guardsmen were deployed and 50,000 were ready to respond.

The American Red Cross said 45,000 people were in its shelters, compared to 30,000 during Katrina. While the number is growing, many spaces planned as shelters have not been needed yet, said Joseph Becker, a disaster services specialist for the organisation.

Homeland Security Secretary Michael Chertoff, speaking from Baton Rouge, said he can't remember a time when FEMA was juggling so many major disasters at once.

'We do have the ability - to use the vernacular - to fight two wars at the same time,' Mr Chertoff told reporters in an interview.

In addition to Gustav, FEMA is also dealing with Hurricane Hanna, more than a dozen major wildfires across the country, flooding in eastern and northern Florida and heavy precipitation predicted later this week over the panhandle and southern coast of Alaska.

Forecasters predict Hanna could come ashore in Georgia and South Carolina late in the week. A new storm, Tropical Storm Ike, formed late Monday afternoon in the Caribbean. -- AP