Paul, which had been the third hurricane this season to threaten the area, had maximum sustained winds near 65 mph and was moving north at about 7 mph, the National Hurricane Center in Miami said.
Forecasters predicted the storm was likely to weaken further but could still dump up to 10 inches of rain in the mountains on Mexico's mainland, causing severe flooding.
Streets were already flooded with ankle-deep water in the resort of Cabo San Lucas, where authorities closed schools and opened eight shelters Tuesday. Officials were searching for the body of an American man who reportedly drowned while swimming in surging waves Monday.
Francisco Cota, civil defense director for the two resort cities of San Jose del Cabo and Cabo San Lucas, had warned that about 2,000 to 3,000 families could be evacuated from flood-risk areas to 49 shelters, mostly schools.
At 11 a.m. EDT, Paul was 310 miles southwest of Cabo San Lucas and about 470 miles southwest of Mazatlan.
Known for their rugged beauty, San Jose del Cabo and Cabo San Lucas are popular with sport fishermen and celebrities and famous for world-class golf courses and pristine beaches flanked by cactus-dotted deserts.
Both Atlantic and Pacific hurricane seasons, which end Nov. 30, have been normal this year, said Dennis Feltgen, a meteorologist at the U.S. National Weather Service. He added that the United States has been fortunate to not be hit by any of the five hurricanes in 2006. The Atlantic had a record season last year with devastating storms — including Hurricane Katrina, which struck New Orleans and the Gulf coast.