Adverse drug reactions (ADRs) are a major concern in clinical healthcare, significantly affecting patient safety and drug development. This study introduces DREAMER, a novel network-based method for exploring the mechanisms underlying ADRs and disease phenotypes at a molecular level by leveraging a comprehensive knowledge graph obtained from various datasets. By considering drugs and diseases that cause similar phenotypes, and investigating their commonalities regarding their impact on specific modules of the protein-protein interaction network, DREAMER can robustly identify protein sets associated with the biological mechanisms underlying ADRs and unravel the causal relationships that contribute to the observed clinical outcomes. Applying DREAMER to 649 ADRs, we identified proteins associated with the mechanism of action for 67 ADRs across multiple organ systems. In particular, DREAMER highlights the importance of GABAergic signaling and proteins of the coagulation pathways for personality disorders and intracranial hemorrhage, respectively. We further demonstrate the application of DREAMER in drug repurposing and propose sotalol, ranolazine, and diltiazem as candidate drugs to be repurposed for cardiac arrest. In summary, DREAMER effectively detects molecular mechanisms underlying phenotypes.