July 23 (Bloomberg) -- Hurricane Dolly was downgraded to a tropical storm after making landfall today on the border between Texas and Mexico, where residents weathered their first direct hit by a hurricane in almost a decade.

Sustained winds fell to 70 miles (110 kilometers) per hour, down from 100 mph when Dolly came ashore as a Category 2 storm at South Padre Island at 1 p.m. local time, the U.S. National Hurricane Center said. Dolly was about 55 miles northwest of Brownsville in Texas at 10 p.m. local time.

``Dolly is expected to continue weakening as it moves further inland,'' the Miami-based government forecaster said. All hurricane warnings were discontinued.

Dolly is the season's first hurricane in the Gulf of Mexico, home to more than a quarter of U.S. oil production. The storm steered south of most rigs, which are off the East Texas and Louisiana shores.

About 61,000 customers in southern Texas were without power as of 3 p.m. local time, said electric utility AEP Texas.

``Our lights flickered on and off, but otherwise we've been lucky,'' said Sokie Gonzales, 55, a manager of the Super 8 motel in Brownsville, about 35 miles from where Dolly made landfall. ``The wind pulled a tree up -- roots and all -- in front of our building.''

Across the Mexican border, guests at the Hotel Colonial in Matamoros checked out last night, said Jose Luis Monjaras, a worker at the hotel. The hotel had yet to stack sandbags or board up windows.

Seeking Shelter

``This isn't going to be a Category 4, so we aren't that worried,'' he said. ``Still, the flooding could be pretty bad.''

At least 2,075 people in Matamoros were in shelters, according to Pablo Carillo of the city's emergency office. More than 2,800 people were in shelters across Texas, according to the governor's office.

Dolly may dump between 8 and 12 inches (20 and 30 centimeters) of rain on southern Texas and northeastern Mexico during the next few days, forecasters at the National Hurricane Center said.

As much as 20 inches may fall in some areas. A coastal storm surge of 6 to 8 feet (1.8 to 2.4 meters) above normal is forecast near and north of the point of landfall.

Texas Governor Rick Perry activated 1,200 National Guard personnel and a half-dozen Black Hawk helicopters, which can deliver emergency supplies. Perry also said he will ask the White House to issue a major disaster declaration for the area.

Evacuating Patients

Some patients have been evacuated from area hospitals, which have 72 hours of provisions, Coast Guard Admiral Harvey Johnson said in a Washington briefing at the Federal Emergency Management Agency.

The last powerful storm to follow Dolly's path was Hurricane Bret, a Category 3 hurricane in 1999, according to Jeff Masters, a meteorologist working at the WeatherUnderground.com Web site.

``Wind damage is the primary threat from Dolly, along with flash flooding from heavy rains,'' Masters wrote on his blog. ``Hurricane Bret spawned two damaging tornadoes in the region in 1999, and we can expect Dolly to spawn a few tornadoes as well. I expect considerable wind damage from Dolly, exceeding $100 million.''

The southern tip of Texas is fortunate in that it lacks much commercial development on the coast, which is largely occupied by Padre Island National Seashore, Masters said. Both Brownsville and Matamoros sit about 20 miles inland, far enough to avoid the storm surge, Masters said.

Damage from Bret was about $60 million, mostly in small towns on the coast, he said.

Insurer Estimates

Dolly may cost insurers as much as $1.2 billion in the U.S., AIR Worldwide, a Boston-based firm that models losses from natural disasters, said in a statement today. Losses in Mexico may be less than a quarter of the U.S. tally, the firm said.

Dolly's heavy rain and wind probably destroyed most cotton fields in the Rio Grande Valley, usually the first region in the U.S. to start its annual harvest, according to Webb Wallace, the executive director for the Cotton & Grain Producers of the Lower Rio Grande Valley in Harlingen, Texas, which represents growers who farm 90,000 acres of cotton. Texas is the biggest U.S. cotton-growing state.

``I am expecting a total loss for the cotton crop,'' Wallace said. ``With this kind of rain and wind, it will be on the ground.''

Energy companies yesterday evacuated some oil rigs as a precaution and cut production in the Gulf by 4.7 percent, according to the U.S. Interior Department.

The forecast for Dolly to miss the rigs helped push the price of oil to a seven-week low. Crude oil for September delivery fell $4.21, or 3.3 percent, to $124.21 a barrel on the New York Mercantile Exchange.

Companies that carried out evacuations include BP Plc, Noble Corp., Chevron Corp., Devon Energy Corp., Citgo Petroleum Corp. and Royal Dutch Shell Plc.

To contact the reporter on this story: Demian McLean in Washington at dmclean8@bloomberg.net.

Last Updated: July 23, 2008 23:43 EDT