If sentences may thought of as the bones of a story, the humble paragraph provides the muscle that gives a story strength and endurance. Artistic strength and endurance come from another source; paragraphs provide the technical construction and govern the approachability of a story. Paragraphs hold the reader’s attention during a scene and lead him to important plot points. Paragraphs provide order for description, and cohesion for exposition.
As far as the reader is concerned, approachability is the single most important factor in your writing. The reader wants your story to be easily understood and digestible in bite-sized chunks; part of this comes from your lexicon, but just as much of it comes from your paragraph construction. Paragraphs visually break up the text on a printed page, causing the reader to take a brief mental break from his reading and process the information just presented.