The hypothalamus in the brain has a thermostatic mechanism which controls body temperature. During fever, a protein called pyrogen is generated. This increases the synthesis of a compound called prostaglandin in the hypothalamus, raising its temperature set point.
Paracetamol acts as an antipyretic and inhibits the synthesis of prostaglandin. Paracetamol reduces fever by promoting heat loss (through sweating and cutaneous vasodilation) and thus helps reset the hypothalamic thermostat.