NEW ORLEANS (Reuters) - Hurricane Gustav slammed ashore on the U.S. Gulf Coast just west of New Orleans on Monday but rebuilt levees appeared to be holding surging floodwaters out of the city devastated by Katrina in 2005.

The storm was weaker than had been feared. But waves splashed over and through cracks in floodwalls protecting the low-lying city, triggering a tense, hours-long watch over the barrier system that failed three years ago, flooding 80 percent of the city and stranding thousands of people.

Six inches of water pooled in some streets near the vulnerable New Orleans Industrial Canal and officials cautioned that while the levees had not been breached, they were still in danger. But some residents emerged from boarded up homes relieved to find only broken tree branches and toppled signs.

"We'll still get some nasty weather but we've dodged a big-time bullet with this one," said stockbroker Peter Labouisse, sitting on the porch of his home, which was shuttered and without power.

The storm roared through the heart of the U.S. Gulf oilpatch but oil and natural gas prices plunged as Gustav weakened to a Category 2 hurricane with 110 mph (177 kph) winds before landfall, easing fears of serious supply disruptions that had put energy markets on edge.

Oil companies had shut down nearly all production in the region, which normally pumps a quarter of U.S. oil output and 15 percent of its natural gas.

Exxon said it was shutting down its Baton Rouge refinery, the second largest in the United States, although the storm weakened to a Category 1 hurricane with 80 mph (129 kph) winds as it moved inland.

Mindful of the ravages of Katrina, which killed some 1,500 people, nearly 2 million people fled the Gulf Coast as Gustav approached and only 10,000 were believed to have remained in New Orleans. 

More than 14,000 National Guard troops and pilots were deployed to the Gulf Coast and the Department of Defense had authorized up to 50,000 troops. Soldiers are routinely deployed in U.S. disasters for rescue and clean-up and to prevent looting.

Louisiana Gov. Bobby Jindal warned residents it was too early to sound the all-clear.

"Just because the storm is moving over your area, do not think that the tidal surge impacts are yet over," he said.

Underscoring continued concern about the fragile flood barriers, officials in rural Plaquemines Parish told the handful of residents remaining to flee as a levee protecting 200 homes had been weakened by water surging over the top.

But waters appeared to be receding in the swollen Industrial Canal that cuts through New Orleans.

"All in all we think we are in pretty good shape, though we are not through yet," Corps Col. Jeff Bedey said.

Some officials noted that catastrophic breaches in the city's levees occurred a day after Katrina departed.

BUSH RESPONSE

Hurricane Gustav also stole the limelight from the Republican Convention to nominate presidential candidate John McCain. It opened on Monday with a bare-bones program stripped of the usual pomp and circumstance.

President George W. Bush, who was heavily criticized for the slow Katrina relief efforts, canceled his appearance at the convention and went to Texas to oversee the relief effort.

McCain, who faces Democratic nominee Barack Obama in November's election, went to Mississippi on Sunday to survey preparations and ordered political speeches canceled on Monday at the convention, apparently concerned that television images of a choreographed Republican celebration while the storm was hitting Louisiana would be seen as out of touch.

A dangerous Category 4 hurricane a few days ago, Gustav hit shore near Cocodrie, Louisiana, about 70 miles southwest of New Orleans, as a Category 2 storm, one step below Katrina's strength at landfall.

Wind ripped through the city, knocking down trees, tearing down shop awnings and bowling trash cans through all but deserted streets.

"Gustav doesn't have no punch," pool builder Randall Dreher said, head bowed into the gale. "I went through Katrina and this is totally different. It's weak."

Energy markets reacted quickly to the weaker storm. Natural gas futures dropped over 6 percent and oil fell about 4 percent on Monday on hopes that it would largely spare production in the Gulf of Mexico. Katrina and Hurricane Rita, which followed it three weeks later, wrecked some 100 Gulf oil platforms.

EQECAT Inc., which helps insurers model catastrophe risk, said it estimated Gustav's insured losses at $6 billion to $10 billion. Katrina's insured losses were more than $40 billion and total damage was more than $80 billion, making it the costliest hurricane in U.S. history.

Katrina brought a 28-foot (8.5 meter) storm surge that burst New Orleans levees on August 29, 2005. The city degenerated into chaos as stranded storm victims waited days for government rescue and law and order collapsed.

Before landfall in Louisiana, Gustav killed at least 97 people in the Dominican Republic, Haiti, Jamaica and Florida. Cuba, swatted by Gustav on Saturday, said on Monday that more than 90,000 houses were damaged or destroyed in the storm.

As U.S. fears over Gustav eased, Tropical Storm Hanna grew to hurricane strength near the southeast Bahamas, threatening the U.S. east coast from Florida to the Carolinas, and Tropical Storm Ike formed in the Atlantic Ocean.