Epic wildfire threatens to engulf Canadian city as 88,000 flee

* 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 wildfire that has forced the evacuation of all 88,000 people in the western Canadian oil city of Fort McMurray and burned down 1,600 structures has the potential to destroy much of the town, authorities said on Wednesday.

With (Other OTC: WWTH - news) a few neighborhoods already in ruins, worsening fire conditions Wednesday pushed walls of flames towards thousands of more homes in the northeastern Alberta town, in the heart of Canada's oil sands region.

Authorities said there had been no known casualties from the blaze itself, but fatalities were reported in at least one car crash 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 has charred 18,500 acres (7,500 hectares) since it erupted on Sunday and exploded in ferocity.

"It (Other OTC: ITGL - news) is a possibility that we may lose a large portion of the town," said Scott Long, an official with Alberta's emergency management agency.

Major oil sands facilities were not in the path of the flames, but companies' efforts to help employees and evacuees and protect pipelines led to a decline in production.

Images from the neighborhood of Beacon Hill in the city's southeast showed rows of charred house foundations, their upper stories burned to the ground, and blankets of white ash within. Officials said 80 percent of houses in the neighborhood, nearly 600 in total, were destroyed.

The regional government said two other neighborhoods, Abasand and Waterways, had sustained "serious loss." Alberta Premier Rachel Notley said a total of about 1,600 structures have been destroyed in Fort McMurray.

"There are certainly areas within the city that have not been burned, but this fire will look for them and it will find them and it will want to take them. And our challenge today is to prevent," said Chief Darby Allen of the Fort McMurray fire department.

The province declared a state of emergency for what was shaping up to be Canada's costliest natural disaster.

Canadian Prime Minister Justin Trudeau said the military can deploy air force planes to the stricken city as needed. Fort McMurray International Airport suspended all commercial flights in and out of the city.

Queen Elizabeth, Canada's head of state, said in a message that she and her husband Prince Philip were "shocked and saddened" by news of the fire. "Our thoughts and prayers are with all those who have been affected," she said.

'EXTREME WILDFIRE BEHAVIOR'

It was the second major blaze in the oil sands region in a year. Last May, wildfires led to the evacuation of hundreds of workers from the region, and a 9 percent cut in Alberta's oil sands output.

The wildfire's knock-on effects on oil sands operations escalated on Wednesday, with five companies including Suncor Energy and Husky Energy (Toronto: HSE.TO - news) reporting reduced production either because workers had been affected by the mass evacuations or because of precautionary pipeline shutdowns.

The total impact on crude production volumes was not immediately clear.

Oil prices briefly rose on concerns about reduced output from the Canadian oil sands (Other OTC: COSWF - news) before paring gains on Wednesday.

Officials said very hot and dry conditions meant "extreme wildfire behavior" on all fronts around the fire late Wednesday.

"We expect this fire to be going on and challenging firefighters to well into the evening tonight," said Chad Morrison, senior manager with Alberta's Wildlife, Agriculture and Forestry.

The Canadian Red Cross said evacuees were calling the organization for help getting food and water.

A highway closure on Tuesday forced most evacuees to drive north, away from major cities. By Wednesday morning, the highway had reopened, but fuel had run out, stranding evacuees seeking to drive out of Fort McMurray. Alberta's transportation department said it was escorting a fuel tanker north to help stranded drivers.

With some fleeing north to work camps operated by energy companies and others clogging the one highway south out of the city, evacuees scrambled to find gasoline and a place to sleep as ash rained down upon the roads and the smell of soot permeated the air.

Twitter (Xetra: A1W6XZ - news) filled with offers of free food, housing and animal care as worried evacuees asked officials and strangers alike about the status of their homes. Two babies were born at one evacuation center on Tuesday.

The conflaguration drew immediate comparisons to one that hit Slave Lake, Alberta in 2011, forcing 7,000 to evacuate and destroying more than 300 buildings.

Insured damage was more than C$700 million, making Slave Lake one of the most expensive insured disasters in the country's history. But Fort McMurray is a much larger settlement than Slave Lake, with some 125,000 people in the region.

Wildfires were also raging in neighbouring British Columbia on Wednesday, including a massive 9,000 hectare blaze in the province's northeast that was threatening to spread across the border to Alberta, the B.C. Wildfire Service said.

(Reporting by Nia Williams in Calgary, Julie Gordon in Vancouver, Leah Schnurr and David Ljunggren in Ottawa and Allison Martell, Ethan Lou, Andrea Hopkins, Fergal Smith and Amran Abocar in Toronto; Writing by Amran Abocar and Dan Whitcomb; Editing by Will Dunham and Mary Milliken)