New Orleans, a bowl-shaped city that sits below sea level and has long feared catastrophic damage from a massive hurricane, took a powerful blow from Katrina. But it may have been spared the worst when the storm turned at the last moment, sending its powerful wall of water toward Mississippi.

"The state has suffered a grievous blow on the coast," said Mississippi Gov. Haley Barbour.

An oil drilling platform 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, where Katrina raged through key offshore oil and gas fields as one of the strongest hurricanes on record.

Katrina, which hit the coast as a Category 4 storm on the five-stage Saffir-Simpson hurricane scale, could become the most expensive storm in US history, costing insurers up to $26 billion, risk analysts said.

In the city known as the birthplace of jazz, the storm shattered high-rise windows, littered the streets of the historic French Quarter with debris and tore through the roof of the Superdome football stadium, where some 10,000 people had taken shelter when authorities ordered New Orleans evacuated.

But its sustained winds dropped to 135 mph (217 kph) as it hit land around daybreak and a late turn to the east may have spared the city even worse damage, as its levee system appeared to hold off the Mississippi River and Lake Pontchartrain.

ROADS FLOODED, POWER LINES DOWN

Louisiana Gov. Kathleen Blanco said more than 100 people were stranded on rooftops and rescuers were slowed by high winds. She urged residents to stay wherever they had sought shelter because roads were flooded and blocked with fallen trees, power lines were down and phone service was out.

"It's too dangerous to come home," Blanco said.

Officials said up to 20 buildings in New Orleans had collapsed or were in danger of doing so.

"We have a tough, tough people," said Blanco. "We party hard, we work hard ... we know we can get through this."

Katrina knocked out electricity to about 670,000 power company customers, or about 1.3 million people, in Louisiana, Mississippi, Alabama and Florida, utility companies said.

By 7 p.m. CDT (0000 GMT) Katrina had deteriorated into a tropical storm centered over Mississippi. It was still packing heavy rains and 65 mph winds, just below hurricane strength.

Katrina's last-minute turn away from New Orleans heightened the misery for the Mississippi coastal tourist havens of Biloxi and Gulfport, where a 20-foot (6-metre) storm surge pushed seawater hundreds of yards (metres) inland.

Alabama officials said two people were killed in a wreck on a waterlogged roadway. Three bodies have been recovered in Mississippi, officials there said.

The storm swept boats onto coastal highways and swamped waterfront casinos in Mississippi.

The casino industry faced the prospect of losing millions of dollars a day and the Mississippi Gaming Commission shut down 17 casinos. Published reports said the Beau Rivage casino and hotel in Biloxi was flooded up to its second floor.

"It came in on Mississippi like a ton of bricks. It's a terrible storm," Barbour said.

Asked about his worst fear, Barbour replied: "That there are a lot of dead people out there."

President George W. Bush approved "major disaster declarations" for Louisiana and Mississippi to help them obtain government aid. "For those of you who are concerned about whether or not we're prepared to help, don't be. We are. We're in place," Bush said.

WHITECAPS IN THE SUBURBS

On the outskirts of New Orleans, waves of water surged through parking lots and the streets of subdivisions, the wind kicking up whitecaps. Katrina plucked trees from the ground, ripped roofs off houses and folded traffic signs in half.

Residents flooded local radio stations with complaints about looting and officials warned looters would be dealt with harshly.

Three people from a New Orleans nursing home died during their evacuation to a Baton Rouge church, officials said.

New Orleans had not been hit directly by a hurricane since 1965 when Hurricane Betsy blew in, flooding the city and killing about 75 people.

Katrina was making its second US landfall after striking southern Florida last week, where it caused widespread flooding and seven deaths.

The storm forced oil companies to shut down production from many of the offshore platforms that provide a quarter of US oil and gas output. Katrina also closed 9 percent of the nation's crude refining capacity that was in its path.

Shell said two of its oil drilling rigs under contract were adrift in the Gulf of Mexico. One rig is owned by Nobel, the other by Transocean Inc.

US oil prices jumped nearly $5 a barrel in opening trade to peak over $70 before settling back to around $67.

Katrina could become the costliest storm in America's history, exceeding the $20.9 billion of inflation-adjusted insurance claims from Hurricane Andrew, which hit Miami in 1992.

Air Worldwide Corp. of Boston estimated a $12 billion to $26 billion insurance payout for Katrina. Risk Management Solutions Inc. of Newark, California, estimated damage at $10 billion to $25 billion.