Earl dropped to a Category 1 hurricane -- down from a powerful Category 4 just a day earlier -- as it wheeled over open water, with winds of 85 mph. It was expected to reach New England late Friday night, passing perilously close to Cape Cod, Nantucket Island and Martha's Vineyard at the start of the Labor Day weekend.
The storm howled past the Outer Banks before daybreak, knocking out power to thousands and closing a road to a main bridge between the islands and the mainland. But Earl's winds had dropped by then to 105 mph from 145 mph a day before. And at its closest approach, the storm's center passed about 85 miles east of Cape Hatteras -- up to 50 miles farther out than forecasters feared.
Hurricane-force winds, which start at 74 mph, apparently did not reach the Outer Banks, the National Hurricane Center's chief forecaster James Franklin said.
"We still think it will be a hurricane when it passes by Cape Cod," Franklin said. Earl was also expected to kick up high surf and dangerous rip currents up and down the East Coast, even along stretches where the storm remained well offshore.
FEMA prepared for the worst, stocking water and prepared meals in staging areas near the North Carolina and Massachusetts coasts. Supplies included 400,000 liters of water and 300,000 meals shipped to Fort Bragg, N.C., and 162,000 liters of water and more than 213,000 meals stored in Westover, Mass.
On the Outer Banks, 1 to 2 feet of water covered roads in the community of Buxton on Cape Hatteras, pushing around plywood, a convenience store ice cooler, a garbage bin and other debris. A Jeep driving down the road had water up to its headlights. Carol Dillon said her home in Hatteras was surrounded by water and her daughter lost two cars in a flooded garage.
Thousands of people on the coast lost electricity.
North Carolina Gov. Beverly Perdue said there was no serious damage and urged people to get back out for the Labor Day weekend to "have a little fun and spend some money."
"Swiping the coast was always better than coming ashore," said Mark Van Sciver of the North Carolina Emergency Operations Center. "We're very grateful that the brunt of the storm passed us by."
North Carolina authorities sent teams out at daybreak to assess the damage. Some 35,000 visitors and residents on the Outer Banks been urged to leave the dangerously exposed islands at the storm closed in, but hundreds of hardy souls chose to wait it out in their boarded-up homes.
Nancy Scarborough of Hatteras said she had about a foot of water underneath her home, which is on stilts. "Once it goes down, it shouldn't take long to get things back together," she said.
Forecasters dropped some storm watches and warnings along the coast from Long Island to Maine but left a hurricane warning in place for southeastern Massachusetts, including Cape Cod, Nantucket and Martha's Vineyard. President Barack Obama declared a state of emergency for Massachusetts to make it easier for the government to provide disaster relief.
Forecasters said Earl would stay 100 to 200 miles off New Jersey and New York's Long Island as it made its way to New England. But the storm could have a punishing effect even from a distance: Earl's hurricane-force winds extended 70 miles from its center, and tropical storm-force winds of at least 39 mph radiated out 205 miles.
At midmorning, Earl buffeted Virginia with rain and gusts up to 45 mph as it passed farther out to sea. Officials in the Maryland beach resort of Ocean City advised people to secure trash cans, lawn furniture and other loose objects. One hotel took the tops off the fake palm trees around its swimming pool. The city of Rehoboth Beach, Del., removed lifeguard stands from the beach.
In Maine, two cruise ships made for the shelter of Portland harbor up to a day early.
Massachusetts Gov. Deval Patrick urged people living in low-lying areas prone to flooding to consider leaving their homes by the afternoon, though no evacuations had been announced outside of North Carolina. Officials on Nantucket Island planned to set up a shelter at a high school on Friday.
"We're asking everyone: Don't panic," Patrick said. "We have prepared well, we are coordinated well, and I'm confident that we've done everything that we can."
Forecasters said much of New England should expect strong, gusty winds much like a nor'easter, along with fallen trees and downed power lines.
In New York City, officials were on alert but said they expected to see only side effects of the storm -- mostly rain and high winds, with possible soil erosion on the beaches and flooding along the oceanside coasts of Brooklyn and Queens.
During its march up the Atlantic, Earl could snarl holiday weekend plans, with several flights already canceled and Amtrak service suspended in places.
Associated Press Writers Christine Armario in Miami; Jessica Gresko in Rehoboth Beach, Del.; Randall Chase in Ocean City, Md.; Martha Waggoner, Emery Dalesio, Tom Foreman Jr. and Gary Robertson in Raleigh, N.C.; Tom Breen in Morehead City, N.C.; Bruce Smith in Jacksonville, N.C.; Jeffrey Collins in Columbia, S.C.; Mark Pratt in Boston; David Porter in Trenton, N.J.; Sara Kugler Frazier in New York; and Frank Eltman in Stony Brook, N.Y., contributed to this report.