Fire requires oxygen (other gases can fuel fires but for simplicity let’s say oxygen). The water completely smothers the fire and stops it getting oxygen gas, so it goes out. At the same time the water also cools down the material that was on fire and makes it less likely to catch fire again.
Water is the easiest and most available but many other things can have the same effect, lots of fire extinguishers use foam or powder, for situations where water would be unsuitable.
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