* Fort McMurray in the heart of Canada's oil sands region
* Commercial flights in and out of city halted (Adds state of emergency declared; fatalities in car crashes)
By Topher Seguin
GREGOIRE LAKE, Alberta, May 4 (Reuters) - A massive wildfirethat has forced the evacuation of all 88,000 people in thewestern Canadian oil city of Fort McMurray and burned down 1,600structures has the potential to destroy much of the town,authorities said on Wednesday.
With a few neighborhoods already in ruins, worsening fireconditions Wednesday pushed walls of flames towards thousands ofmore homes in the northeastern Alberta town, in the heart ofCanada's oil sands region.
Authorities said there had been no known casualties from theblaze itself, but fatalities were reported in at least one carcrash among the evacuees. Thousands bunked down in arenas,hockey rinks and oil work camps, often short on fuel and food.
Crews meanwhile had been unable to stop the fire, which hascharred 18,500 acres (7,500 hectares) since it erupted on Sundayand exploded in ferocity.
"It is a possibility that we may lose a large portion of thetown," said Scott Long, an official with Alberta's emergencymanagement agency.
Major oil sands facilities were not in the path of theflames, but companies' efforts to help employees and evacueesand protect pipelines led to a decline in production.
Images from the neighborhood of Beacon Hill in the city'ssoutheast showed rows of charred house foundations, their upperstories burned to the ground, and blankets of white ash within.Officials said 80 percent of houses in the neighborhood, nearly600 in total, were destroyed.
The regional government said two other neighborhoods,Abasand and Waterways, had sustained "serious loss." AlbertaPremier Rachel Notley said a total of about 1,600 structureshave been destroyed in Fort McMurray.
"There are certainly areas within the city that have notbeen burned, but this fire will look for them and it will findthem and it will want to take them. And our challenge today isto prevent," said Chief Darby Allen of the Fort McMurray firedepartment.
The province declared a state of emergency for what wasshaping up to be Canada's costliest natural disaster.
Canadian Prime Minister Justin Trudeau said the military candeploy air force planes to the stricken city as needed. FortMcMurray International Airport suspended all commercial flightsin and out of the city.
Queen Elizabeth, Canada's head of state, said in a messagethat she and her husband Prince Philip were "shocked andsaddened" by news of the fire. "Our thoughts and prayers arewith all those who have been affected," she said.
'EXTREME WILDFIRE BEHAVIOR'
It was the second major blaze in the oil sands region in ayear. Last May, wildfires led to the evacuation of hundreds ofworkers from the region, and a 9 percent cut in Alberta's oilsands output.
The wildfire's knock-on effects on oil sands operationsescalated on Wednesday, with five companies including SuncorEnergy and Husky Energy reporting reducedproduction either because workers had been affected by the massevacuations or because of precautionary pipeline shutdowns.
The total impact on crude production volumes was notimmediately clear.
Oil prices briefly rose on concerns about reduced outputfrom the Canadian oil sands before paring gains onWednesday.
Officials said very hot and dry conditions meant "extremewildfire behavior" on all fronts around the fire late Wednesday.
"We expect this fire to be going on and challengingfirefighters to well into the evening tonight," said ChadMorrison, senior manager with Alberta's Wildlife, Agricultureand Forestry.
The Canadian Red Cross said evacuees were calling theorganization for help getting food and water.
A highway closure on Tuesday forced most evacuees to drivenorth, away from major cities. By Wednesday morning, the highwayhad reopened, but fuel had run out, stranding evacuees seekingto drive out of Fort McMurray. Alberta's transportationdepartment said it was escorting a fuel tanker north to helpstranded drivers.
With some fleeing north to work camps operated by energycompanies and others clogging the one highway south out of thecity, evacuees scrambled to find gasoline and a place to sleepas ash rained down upon the roads and the smell of sootpermeated the air.
Twitter filled with offers of free food, housing and animalcare as worried evacuees asked officials and strangers alikeabout the status of their homes. Two babies were born at oneevacuation center on Tuesday.
The conflaguration drew immediate comparisons to one thathit Slave Lake, Alberta in 2011, forcing 7,000 to evacuate anddestroying more than 300 buildings.
Insured damage was more than C$700 million, making SlaveLake one of the most expensive insured disasters in thecountry's history. But Fort McMurray is a much larger settlementthan Slave Lake, with some 125,000 people in the region.
Wildfires were also raging in neighbouring British Columbiaon Wednesday, including a massive 9,000 hectare blaze in theprovince's northeast that was threatening to spread across theborder to Alberta, the B.C. Wildfire Service said.
(Reporting by Nia Williams in Calgary, Julie Gordon inVancouver, Leah Schnurr and David Ljunggren in Ottawa andAllison Martell, Ethan Lou, Andrea Hopkins, Fergal Smith andAmran Abocar in Toronto; Writing by Amran Abocar and DanWhitcomb; Editing by Will Dunham and Mary Milliken)
