The All Whites, who recorded three successive draws at the World Cup finals in June, including a 0-0 draw with Paraguay in Polokwane, had also drawn 1-1 with Honduras in Auckland on Sunday in their first match since they finished as the only unbeaten team at the tournament.
On Tuesday, however, New Zealand were without the calming influence of captain and central defender Ryan Nelsen, who was ruled out with a thigh strain, which Paraguay exploited at every opportunity at Westpac Stadium.
Both of Paraguay's goals came in the first half when the defence was caught out with Ben Sigmund bringing down Edgar Benitez in the box. Nelson Valdez converted the resulting penalty in the 22nd minute.
Osvaldo Martinez's run from deep five minutes later then sprung the flat-footed defence and he calmly chipped over the advancing Mark Paston to give the visitors a 2-0 lead.
Valdez could have put the game beyond doubt before the break after he was played onside by a wayward Sigmund on the far side of the field, but instead blasted the ball into Paston's legs when he only had the big keeper to beat.
The All Whites had their two best chances early in the second half when captain Tim Brown's shot from a Jeremy Brockie cross cannoned into Justo Villar's legs, before an unmarked Chris Killen failed to control a Leo Bertos cross in front of goal.
The home side had the majority of half chances in the second spell, though they were unable to convert and Winston Reid's straight red card for a rough tackle on Paraguay substitute Federico Santander in the 89th minute ended the match as a contest.
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