Does a QTimer object run in a separate thread? What is its mechanism?

QTimer object registers itself into EventDispatcher (QAbstractEventDispatcher) which than takes care to send events of type QTimerEvent every time there is timeout for a particular registered QTimer. For example, on GNU/Linux there is a private implementation of QAbstractEventDispatcher called QEventDispatcherUNIXPrivate that makes calculations taking in consideration the platform api for the time. The QTimerEvent are sent from QEventDispatcherUNIXPrivate into the queue of the event loop of the same thread where QTimer object belongs, i.e. was created.

QEventDispatcherUNIXPrivate doesn't fire a QTimerEvent because of some OS system event or clock, but because it periodically checkes the timeout when processEvents is called by the thread event loop where QTimer lives too. Se here: https://code.woboq.org/qt5/qtbase/src/corelib/kernel/qeventdispatcher_unix.cpp.html#_ZN27QEventDispatcherUNIXPrivateC1Ev

Looking at the documentation about timers and at the source code of QTimer and QObject we can see that the timer is running in the thread/event loop that is assigned to the object. From the doc:

For QTimer to work, you must have an event loop in your application; that is, you must call QCoreApplication::exec() somewhere. Timer events will be delivered only while the event loop is running.

In multithreaded applications, you can use QTimer in any thread that has an event loop. To start an event loop from a non-GUI thread, use QThread::exec(). Qt uses the timer's thread affinity to determine which thread will emit the timeout() signal. Because of this, you must start and stop the timer in its thread; it is not possible to start a timer from another thread.

Internally, QTimer simply uses the QObject::startTimer method to fire after a certain amount of time. This one itself somehow tells the thread it's running on to fire after the amount of time.

So your program is fine running continously and keeping track of the timers as long as you don't block your event queue. If you are worried of your timer being not 100% accurate try to move long-running callbacks out of the event queue in their own thread, or use a different event queue for the timers.

When I create a QTimer object in Qt 5, and start it using the start() member function, is a separate thread created that keeps track of the time and calls the timeout() function at regular intervals?

No; creating a separate thread would be expensive and it isn't necessary, so that isn't how QTimer is implemented.

Here, how does the program know when timeout() occurs?

The QTimer::start() method can call a system time function (e.g. gettimeofday() or similar) to find out (to within a few milliseconds) what the time was that start() was called. It can then add ten milliseconds (or whatever value you specified) to that time and now it has a record indicating when the timeout() signal is supposed to be emitted next.

So having that information, what does it then do to make sure that happens?

The key fact to know is that QTimer timeout-signal-emission only works if/when your Qt program is executing inside Qt's event loop. Just about every Qt program will have something like this, usually near the bottom its main() function:

QApplication app(argc, argv);
[...]
app.exec();

Note that in a typical application, almost all of the application's time will be spent inside that exec() call; that is to say, the app.exec() call will not return until it's time for the application to exit.

So what is going on inside that exec() call while your program is running? With a big complex library like Qt it's necessarily complicated, but it's not too much of a simplification to say that it's running an event loop that looks conceptually something like this:

 while(1)
 {
     SleepUntilThereIsSomethingToDo();  // not a real function name!
     DoTheThingsThatNeedDoingNow();     // this is also a name I made up
     if (timeToQuit) break;
 }

So when your app is idle, the process will be put to sleep inside the SleepUntilThereIsSomethingToDo() call, but as soon as an event arrives that needs handling (e.g. the user moves the mouse, or presses a key, or data arrives on a socket, or etc), SleepUntilThereIsSomethingToDo() will return and then the code to respond to that event will be executed, resulting in the appropriate action such as the widgets updating or the timeout() signal being called.

So how does SleepUntilThereIsSomethingToDo() know when it is time to wake up and return? This will vary greatly depending on what OS you are running on, since different OS's have different APIs for handling this sort of thing, but a classic UNIX-y way to implement such a function would be with the POSIX select() call:

int select(int nfds, 
           fd_set *readfds, 
           fd_set *writefds,
           fd_set *exceptfds, 
           struct timeval *timeout);

Note that select() takes three different fd_set arguments, each of which can specify a number of file descriptors; by passing in the appropriate fd_set objects to those arguments you can cause select() to wake up the instant an I/O operations becomes possible on any one of a set of file descriptors you care to monitor, so that your program can then handle the I/O without delay. However, the interesting part for us is the final argument, which is a timeout-argument. In particular, you can pass in a struct timeval object here that says to select(): "If no I/O events have occurred after (this many) microseconds, then you should just give up and return anyway".

That turns out to be very useful, because by using that parameter, the SleepUntilThereIsSomethingToDo() function can do something like this (pseudocode):

void SleepUntilThereIsSomethingToDo()
{
   struct timeval now = gettimeofday();  // get the current time
   struct timeval nextQTimerTime = [...];  // time at which we want to emit a timeout() signal, as was calculated earlier inside QTimer::start()
   struct timeval maxSleepTimeInterval = (nextQTimerTime-now);
   select([...], &maxSleepTimeInterval);  // sleep until the appointed time (or until I/O arrives, whichever comes first)
}

void DoTheThingsThatNeedDoingNow()
{
   // Is it time to emit the timeout() signal yet?
   struct timeval now = gettimeofday();
   if (now >= nextQTimerTime) emit timeout();

   [... do any other stuff that might need doing as well ...]
}   

Hopefully that makes sense, and you can see how the event loop uses select()'s timeout argument to allow it to wake up and emit the timeout() signal at (approximately) the time that it had previously calculated when you called start().

Btw if the app has more than one QTimer active simultaneously, that's no problem; in that case, SleepUntilThereIsSomethingToDo() just needs to iterate over all of the active QTimers to find the one with the smallest next-timeout-time stamp, and use only that minimum timestamp for its calculation of the maximum time-interval that select() should be allowed to sleep for. Then after select() returns, DoTheThingsThatNeedDoingNow() also iterates over the active timers and emits a timeout signal only for those whose next-timeout-time stamp is not greater than the current time. The event-loop repeats (as quickly or as slowly as necessary) to give a semblance of multithreaded behavior without actually requiring multiple threads.