Hurricane Paloma strengthened into an "extremely dangerous" Category 4 storm yesterday as it pounded the wealthy British Caribbean territory of the Cayman Islands and headed toward storm-battered Cuba.

Paloma's eye passed just to the east of Grand Cayman, the main island and home to most of the more than 50,000 people in the important offshore financial centre, but damage appeared to be light and there were no immediate reports of deaths.

"There is no damage to central George Town, where the bulk of the financial sector is located," said Cindy Scotland, an official with the Cayman Islands Monetary Authority. "So there is no reason to think there has been any damage in any way to the infrastructure of the financial services sector."

"The Authority does not expect any reports of significant, if any, interruptions in business," she said.

Cuba, already hammered this year by hurricanes Gustav and Ike, declared an emergency in central and eastern parts of the island, cancelled all national air and ground transportation and began evacuating hundreds of thousands of residents.

Authorities issued an "all-clear" early yesterday for Grand Cayman but cautioned residents to move about carefully. Power was out in some parts of the island and the streets of George Town were littered with tree branches.

Paloma's sustained winds increased to 225 km per hour early yesterday as the storm hurtled across the group's smaller islands, Cayman Brac, home to 1,800 people, and Little Cayman, with a population of about 100.

Governor Stuart Jack asked that the British auxiliary ship Wave Ruler head straight to the smaller islands after the storm passes.

"Paloma is now an extremely dangerous category four hurricane on the Saffir-Simpson scale," the US National Hurricane Centre said.

Category 4 hurricanes can generate tidal surges up to 5.5 metres above normal and their winds can tear off the roofs and blow out the doors and windows of small homes.