By Charles Mangwiro

MAPUTO, Feb 23 (Reuters) - A powerful tropical storm killed four people and injured at least 70 in Mozambique's resort town of Vilanculos, where thousands of homes were destroyed along with the hospital and power grid, officials said on Friday.

Cyclone Favio was downgraded to a tropical storm on Friday as wind speeds dropped from a peak of 270 kph (170 mph) to between 60-80 kph (37-50 mph), but officials fear rains from the storm could still dramatically worsen an existing flood disaster in the centre of the country.

Vilanculos Mayor Selmane Amugy said the deaths occurred when Favio crashed ashore early on Thursday, hitting people's homes as they were sleeping.

"Four people were killed, 70 others seriously injured and some 2,000 homes were destroyed ... there are no words to describe the drama, I haven't seen such a thing in my life," he said by phone the resort town some 800 km (500 miles) north of the capital, Maputo.

"All 600 prisoners escaped when the local jail was destroyed and we had to evacuate some 120 patients from the rural hospital," he said.

Amugy said many key buildings in Vilanculos -- a popular beach town favoured by South African and other foreign tourists -- were damaged and the local airport was closed.

"We had to call off all operations at the airport ... trees at Tofo Beach were uprooted and homes destroyed and this worsened erosion," he said.

Bazaruto Island, another popular Mozambican tourist destination which is reachable only by boats and helicopters, was still cut off from communications as the regional electricity grid was wrecked.

At the peak of the summer season, Bazaruto attracts wealthy tourists from across the world to its upmarket lodges.

The government has dispatched an emergency team of medical personnel, engineers and technicians to assess the damage.

Mozambique's national weather agency INAM said the weakened storm was headed northwards toward the port city of Beira, where its outer edges struck on Friday.

Officials fear it may take its rains onward toward the Zambezi river basin, where several weeks of severe flooding has already displaced more than 120,000 people.

"It's no longer a tropical cyclone now, it's a tropical depression meaning it has weakened but still accompanied by heavy rains ... it has winds of between 60 and 80 kilometres per hour", INAM spokesman Helder Sueia told Reuters.

Sueia said the storm unearthed trees and blew off rooftops in Beira's densely populated surbub of Pontagea on Friday.

"It's still taking the same direction and it's not as powerful as it was a few hours ago ... but the rains can still impact on the flooding situation," he said.

Officials and humanitarian agencies are already battling to keep tens of thousands of flood refugees in central Mozambique supplied with food and fresh water.

The former Portuguese colony, rising from a devastating 16 year political conflict, saw its worst disaster on record in 2000-2001 when a series of cyclones compounded widespread flooding in southern and central parts of the country, killing 700 people and driving close to half a million from their homes.

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