The storm's eyewall, the front edge that packs some of its strongest punch, reached the barrier island of South Padre Island, northeast of the border town of Brownsville, Texas.

The storm was a Category 2 hurricane, the second level on the five-step Saffir-Simpson scale of hurricane intensity.

At 1 p.m. EDT (1700 GMT), the center of Dolly was about 35 miles (60 km) north of Brownsville.

"My dock has been torn down," said Russell Stockton, who operates Dolphin Docks, a dolphin-viewing tour company, on South Padre Island. "It's about US$50,000 worth of damage so far."

The storm steered clear of most offshore drilling rigs and production platforms in the Gulf of Mexico. US crude oil prices, affected earlier in the week by worries about possible storm damage, hit 6-week lows on Tuesday and fell further on Wednesday to below US$126 a barrel.

The hurricane center issued a hurricane warning for the southern Texas coast as far north as Corpus Christi.

Category 3 to 5 storms are considered the most dangerous but a Category 2 hurricane is still capable of causing damage to poorly built or fragile dwellings such as mobile homes.

The NHC said Dolly could dump up to 20 inches (51 cm) of rain on low-lying areas in South Texas and northeastern Mexico in coming days.

The prospect of heavy rains and a storm surge of sea water pushing back upstream has spurred concerns that levees holding back the Rio Grande River could be breached, causing widespread flooding.

Texas Gov. Rick Perry put 1,200 National Guard troops on alert and issued a disaster declaration for 14 low-lying counties. State officials said they would not order mandatory evacuations unless Dolly reached Category 3, with wind speeds of over 111 mph (178 kph). Hurricanes usually weaken rapidly over land.

Some 250 buses stood by in the inland city of San Antonio to evacuate coastal residents if needed.

FLOODING IS MAJOR CONCERN

In Cameron County near the Mexico border, officials expected up to 20 inches (51 cm) of rain. "That's going to do a number on our county," said Johnny Cavazos, the county's emergency management coordinator.

Levees holding back the Rio Grande could fail if Dolly drives a surge of water from the mouth of the river inland, Cavazos said. The levees held under similar conditions during Hurricane Beulah in 1967, but have "seriously deteriorated" since then, he said.

Texas State Police Captain Joe Gonzalez, who heads the combined emergency management system in Brownsville, said he was confident the levees would hold.

More than 27,000 customers were without electricity in South Texas, most of them in Cameron County, according to the power company.

Officials late on Tuesday closed a causeway connecting Brownsville with South Padre Island. Many residents of the island had already left.

In the Mexican city of Matamoros, across the border from Brownsville, strong gusts of wind and rain pummeled the town, and many streets began to flood.

Four Mexican fisherman were missing off the Yucatan Peninsula after Dolly swept through the area on Monday, port authorities said.

The 2008 Atlantic hurricane season is already a month ahead of schedule. On average, the fourth tropical storm of the six-month season does not occur until Aug. 29. Dolly, this year's fourth, formed on July 20.

(Additional reporting by Jim Forsyth in San Antonio, Michael Christie in Miami, Tomas Bravo in Matamoros, Mexico, and Jose Cortazar in Cancun; Editing by Frances Kerry)

(For latest US National Hurricane Center reports, see http://www.nhc.noaa.gov/)