More than eight inches (20cm) of rain fell around the Wilmington area, and forecasters warned of more to come.

The governors of both North and South Carolina have activated National Guard troops, while the Virginia governor has declared a state of emergency.

Forecasters issued warnings of tornadoes and storm surges.

Ernesto made landfall near Cape Fear in North Carolina at 2330 (0330 GMT).

It is packing maximum sustained wind speeds of 70mph (113 km/h) - just below the 74mph threshold for it to be declared a hurricane. It is moving north-northwest at 18mph, said the National Hurricane Center.

It brought heavy rain to both North and South Carolina from mid-afternoon on Thursday.

Services closed

Power companies reported some outages and some roads were flooded.

Some ferry services, ports and campsites were closed, though no evacuations have been ordered in either state.

A tropical storm warning remains in effect from north of the South Santee river to Currituck Beach Light, forecasters said. A hurricane watch is in effect from South Santee river to Cape Lookout in North Carolina.

Forecasters also warned that storm surges of up to five feet above normal tide levels were possible along the North Carolina coast, and that heavy rain of up to 10 inches could fall in north-eastern South Carolina into the mid-Atlantic states.

They say Ernesto could spawn isolated tornadoes in parts of North Caroline and Virginia.

For North Carolinians, some rain is welcome after a widespread summer drought, but residents fear a repeat of catastrophic flooding caused by Hurricane Floyd in 1999.

"We need some rain around here - just not all at once," convenience store worker Jean Evans told Associated Press from North Caroline's Holden Beach.

Ernesto was briefly the year's first hurricane on Sunday when its winds reached 75mph before it weakened over the mountains of Haiti.

The storm killed at least two people in Haiti before striking Cuba, where it dropped up to seven inches of rain before fading into showers and thunderstorms.

It began intensifying after passing over Cuba and forecasters had feared it could come ashore at hurricane strength. But in the end Ernesto passed through Florida as a weak tropical storm.

The agreement, the result of months of fractious negotiation and considerable bad blood between Mr Schwarzenegger and his fellow Republicans, sets California far apart from the Bush administration, which has rejected the Kyoto Protocol and questioned the very existence of global warming.

It also opens the way to an outpouring of technological advances in alternative energy in the Golden State - from solar panels on homes and businesses to battery-powered cars and biodiesel trucks.

Like others, Mr Schwarzenegger argues that fighting global warming makes good business as well as environmental sense.

"We can now move forward with developing a market-based system that makes California a world leader in the effort to reduce carbon emissions," the Governor said in a statement. "The success of our system will be an example for other states and nations to follow as the fight against climate change continues. [This deal] strengthens our economy, cleans our environment and once again, establishes California as the leader in environmental protection."

Environmentalists and Democratic leaders with whom Mr Schwarzenegger hashed out the deal on Wednesday were equally ecstatic. California state assembly speaker Fabian Nunez said the deal was "the most important day in my legislative career". Bob Epstein, of the business lobbying group Environmental Entrepreneurs, said: "This is the tipping point in the country's climate-change debate."

The deal settled the final wording of Assembly Bill 32, which is expected to sail across the Governor's desk. Mr Schwarzenegger is also expected to sign a second bill from the state Senate, prohibiting California from importing new energy sources that did not meet strict emissions standards.

Perhaps the most intriguing part of the legislation is the creation of a system of emissions credits. If a company exceeds its targets on emissions reduction, it can sell the excess to a company lagging behind, creating a financial incentive for businesses to do their bit for the environment.

This was one of the talking points when Mr Schwarzenegger and Mr Blair signed their UK-California partnership agreement on global warming in Los Angeles at the end of last month.

There are signs that the idea may now be copied in other states, starting with Illinois, which sent a delegation of lawmakers on a fact-finding trip to California a few days ago.

The deal is a political coup for Mr Schwarzenegger as he faces a race for re-election in November and may emerge as the signature achievement of his first term. After his popularity slumped to record lows by steering his administration too far to the right last year, he has now gone in the other direction, in part under the influence of his die-hard Democrat wife Maria Shriver, a member of the Kennedy clan.

His environmental advisers are not former energy industry lobbyists, like many of President Bush's appointees, but are long-standing green activists. They have encouraged him to offer incentives for Californians to build solar panels on their roofs. He has also championed research into alternative energies, especially hydrogen fuel cells, and pushed for cleaner car exhausts.

Such initiatives make eminent good sense in an environmentally conscious state like California, which is always at the forefront of regulations to curb pollution - not least because of numerous smog crises suffered first in Los Angeles and, more recently, in the agriculture-intensive Central Valley.

Mr Schwarzenegger has nevertheless broken several rules of modern-day partisan politicking. The Republican minority in the California legislature has opposed the greenhouse gas initiative all the way and has not offered a single vote in favour of either of the bills.

George Plescia, who leads the Republican delegation in the California assembly, condemned the deal almost immediately. "Adopting costly and unattainable regulations will drive businesses and jobs out of California into other states," he said, "and even into other countries with no commitment to improve air quality."

Industry lobbyists and their political allies are unlikely to give up. History suggests they will press to water down Assembly Bill 32, continuing all the way to 2012, when the first emissions mandates kick in.

But there are also reasons to suppose some business interests will continue to support the bill. "Imposing environmental regulations and cleaning up the air clearly hasn't hurt the Californian economy in the past," said Mark Bernstein, a senior policy researcher specialising in energy and environmental issues at the Rand Corporation.

"Now there's money to be made on developing technologies to reduce greenhouse gas emissions. California is where a lot of the research and development is going to take place."