Forecasters say Lee has weakened to a tropical depression with top sustained winds of 35 mph.
The National Hurricane center in Miami says the weather system is continuing its slow crawl to the east-northeast at 7 mph. It was centered about 55 miles west-northwest of McComb, Mississippi.
The downgrade in its status means that all tropical storm watches and warnings have been discontinued.
Forecasters expect the tropical depression to move across Mississippi overnight and on Monday.
Before the storm weakened, Lee dumped more than a foot of rain in New Orleans and spun off tornadoes elsewhere Sunday as its center came ashore in a slow crawl north that raised fears of inland flash flooding in the Deep South and beyond.
Areas of Alabama, Louisiana and Mississippi near the coast reported scattered wind damage and flooding, but evacuations appeared to be in the hundreds rather than the thousands and New Orleans' levees were doing their job just over six years after Hurricane Katrina swamped the city.
National Hurricane Center specialist Robbie Berg said Lee's flash flood threat could be more severe as the rain moves from the flatter Gulf region into the rugged Appalachians.
Closer to the Gulf, the water is "just going to sit there a couple of days," he said. "Up in the Appalachians you get more threat of flash floods so that's very similar to some of the stuff we saw in Vermont."
Vermont is still cleaning up and digging out dozens of communities that were damaged and isolated last week when heavy rain from Tropical Storm Irene quickly flooded mountain rivers.
No deaths had been directly attributed to the storm, though a body boarder in Galveston, Texas, drowned after being pulled out to sea in heavy surf churned up by Lee. A man in Mississippi suffered non-life-threatening injuries when authorities said he was struck by lightning that traveled through a phone line.
The vast, soggy system spent hours during the weekend hovering in the northernmost Gulf of Mexico before its center finally crossed into Louisiana west of New Orleans, pelting a wide swath of coastline.
Some of the damage on the Gulf Coast, where tropical storms are an almost yearly event, appeared to come from spinoff tornadoes that touched down in southern Mississippi and Alabama.
Lee is forecast to dump 10 to 15 inches of rain in many areas in the coming days, and up to 20 inches in scattered spots.
"There's a large area of more than 8 inches of rain that's fallen over especially portions of south east Louisiana with isolated areas of 12 to 14 inches," said Corey Peeper, a meteorologist with the National Weather Service.
With the upcoming Labor Day holiday, the storm forced a lot of people to change weekend plans.
Tiger Hammond, president of the Greater New Orleans AFL-CIO, says the group's annual Labor Day picnic was canceled.
"We'd either have to be out there in hip boots or shrimp boots because that's the only you'd have gotten to our picnic grounds this year," he said. "Because you can have 2 to 3 inches of rain and they have street flooding over in the City Park area."
Hammond says the picnic has been rescheduled for Oct. 15.
The sluggish storm stalled just offshore for several hours Saturday before meandering to the north and west in the evening.
No injuries were reported, but there were scattered instances of water entering low-lying homes and businesses in Louisiana. Thousands were without power.
Coffers were suffering at many coastal businesses that depend on a strong end-of-summer weekend. Alabama beaches that would normally be packed were largely empty, and rough seas closed the Port of Mobile. Mississippi's coastal casinos, however, were open and reporting brisk business.
In New Orleans, sporadic downpours caused some street flooding in low-lying areas early Saturday, but pumps were sucking up the water and sending it into Lake Pontchartrain. Lee's surge so far had not penetrated levees along the coast, National Weather Service forecaster Robert Ricks said.
"A all of us who have been through this know, it's not how much we get, but how much we get in a short period of time," New Orleans Mitch Landrieu said.
The storm was denting offshore energy production. The Bureau of Ocean Energy Management, Regulation and Enforcement said 237 oil and gas production platforms and 23 drilling rigs have been evacuated by Lee. The agency estimates that about 60 percent of the current oil production in the Gulf and almost 55 percent of the natural gas production has been shut in. It's unlikely the decreased oil production in the Gulf will have much effect on gas prices at the pump.
In Alabama, rough seas forced the closure of the Port of Mobile. Pockets of heavy rain pounded the beaches Saturday, and strong winds whipped up the surf and bowed palm trees. But just a couple miles inland, wind and rain dropped significantly.
In the open Atlantic, Katia has regained hurricane status again, according to the National Hurricane Center.
Katia has cycled on and off between tropical storm and hurricane status while moving across the open Atlantic, hurricane specialist Robbie Berg told The Associated Press by telephone. He says the storm strengthened recently and now has maximum sustained winds of about 75 mph, the lowest-level Category 1 storm.
At 5 a.m. EDT, Katia's center was about 370 miles northeast of the Northern Leeward Islands and it was moving 12 mph toward the northwest.
Berg said Katia poses no threat to land over the next 48 hours, but he urged those on the East Coast and in Bermuda, a British territory in the mid-Atlantic, to remain watchful but not be alarmed.
NPR's Jeff Brady and Allison Keyes contributed to this report, which includes material from The Associated Press
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