Hurricane Gustav has weakened to a category 1 storm after it crashed ashore in Louisiana west of New Orleans, the National Hurricane Center said.
The centre said the storm's winds had fallen to 145km per hour and that it was expected to weaken further as it moved inland.
Gustav hammered the city devastated by Katrina three years ago with surging floodwaters.
Wave surges washed over a levee wall lining a portion of the city's Ninth Ward and water had reached as high as road signs around the Industrial Canal in the ward's north.
'We are nowhere near out of danger yet,' New Orleans Mayor Ray Nagin said, with an estimated 10,000 residents still in the city after a mandatory evacuation forced nearly two million people to flee coastal areas over the weekend.
About half of the storm had passed over New Orleans after Gustav slammed ashore as a Category Two hurricane packing winds of 175km per hour.
Louisiana officials said there were about 750 National Guard troops in New Orleans in case a new rescue operation was needed, with memories still fresh of the destruction wrought by Katrina and the government's botched response.
President George W Bush, visiting Austin, Texas to oversee relief preparations, said: 'The coordination on this storm is a lot better than during Katrina.'
Mr Bush, who had scrapped his plans to attend the Republican national convention in St Paul, Minnesota, said 'I feel good about this event'.
But he also warned that 'the storm has yet to pass, it's a serious event'.
Mr Bush's administration suffered a grievous political blow after its response to the Katrina disaster in late August 2005, which killed some 1,800 people and left hundreds of thousands homeless for months.
Earlier, two boats and a barge broke free in the Industrial Canal, triggering fears that the vessels may crash through the waterway's wall in a repeat of what happened during Katrina three years ago.
Boats and barges were supposed to be cleared from the canals as a precaution against them becoming battering rams that could breach canal walls.
Nearly 2m people fled the state of Louisiana as evacuation orders were issued yesterday ahead of what was then a Category 4 hurricane.
Oil production halted
Energy companies have shut nearly all offshore Gulf oil and gas production, and were halting production at Louisiana refineries yesterday.
More than 96% of the area's oil output and 82% of gas was offline from late yesterday.
At least nine refineries with a combined capacity of 2.2m barrels per day, or 12.5% of US refining capacity, were shut down on the south Louisiana coast.
Earlier, a top aide to Mr Bush warned of 'weaknesses' in New Orleans' levee system and said anyone who stayed in the city in the face of Hurricane Gustav had 'no excuses'.
'There should not be any excuses. If people stayed in New Orleans, it was their choice,' Federal Emergency Management Agency director David Paulison said as Mr Bush travelled to the city to assess the government response to Gustav.
Mr Paulison cited 'unprecedented cooperation' among government agencies and the private sector, saying disaster response officials had learned tough lessons from their botched response to killer Hurricane Katrina three years ago.
