By Yimou Lee, Fabian Hamacher and Ann Wang

KAOHSIUNG, Taiwan (Reuters) -Taiwan shut down on Wednesday, grounding hundreds of flights and closing schools, offices and financial markets ahead of the arrival of a weakening Typhoon Krathon with one person reported dead and torrential rain lashing the island's south.

Officials in the key port city of Kaohsiung, set to be in the eye of the storm, told people to stay home and avoid the sea, rivers and mountains, warning of a repeat of 1977's Typhoon Thelma that killed 37 and devastated the city of 2.7 million.

Although the typhoon has weakened, the threats from a storm surge, strong winds and rain remain as it slowly makes its way towards Taiwan's coast, weather forecasters said.

The typhoon would lose power once it hit land, said Kaohsiung Mayor Chen Chi-mai, but would still bring intense winds and rain.

"But if it moves north, the winds will strengthen again, so the threat to Kaohsiung will continue to exist, and people cannot take this lightly," he told reporters.

Once it hits land, the typhoon could be downgraded into a tropical depression and dissipate, which has happened only once before in Taiwan, in 2001, forecasters said. That storm, called Trami, dumped vast amounts of rain leading to massive flooding.

The fire department reported one person dead, an elderly man in the eastern county of Hualien who fell from a tree, with two others missing and 70 injuries.

On Wednesday, all the island's cities and counties declared a day off, shutting financial markets and cancelling domestic flights, along with 246 international ones, while more than 10,000 people were evacuated, mostly in the south and east.

In Taipei, some malls and shops remained open, with rain only expected later in the day.

Typhoons often hit Taiwan's mountainous and sparsely populated east coast facing the Pacific, but Krathon is set to make landfall on its flat western plain.

It is forecast to hit between Kaohsiung and its neighbouring city of Tainan in the early hours of Thursday, before heading northeast up towards Taipei, the capital, the Central Weather Administration (CWA) said.

"Because of Typhoon Gaemi being quite severe earlier this year, everyone is more cautious and prepared this time around," said sales representative Yu Ren-yu, 35, picking up sandbags at a government office, referring to July's storm that killed 11.

"First be prepared, then we can face this typhoon."

The typhoon has revived the older generation's bad memories of Thelma, prompting extra precautions, said Chou Yi-tang, a government official working in the Siaogang district home to the airport.

"We were hit directly by the eyewall," he added, describing events almost five decades ago. "Power was out for two weeks and no water for almost a month. It was disastrous."

More than 700 sandbags have been distributed in his district, a record for a typhoon, while authorities are making more to meet demand, Chou said.

Taiwan's defence ministry said it had put more than 38,000 troops on standby.

The north-south high speed rail line stayed open, but scaled back services.

TSMC, the world's largest contract chipmaker and a major Apple and Nvidia supplier, said on Tuesday it did not expect the typhoon would have a significant impact on operations.

TSMC's factories are along the west coast, some in the city of Tainan.