The four-time champions came into the match at Green Point Stadium under pressure after a underwhelming build-up and they had to dig deep to salvage a point.
On a cold and wet night, the South Americans stunned Marcello Lippi's men by taking the lead on 39 minutes when Antolin Alcaraz outjumped ageing Italy captain Fabio Cannavaro and Daniele De Rossi to head home a cross.
De Rossi redeemed himself by grabbing the equaliser eight minutes into the second half, making the most of goalkeeper Justo Villar's failure to clear a corner to put the Italians back into the game.
Italy, who are often slow to start at big tournaments, turned up the heat after their goal and they could have had more, but Paraguay clung on to share the Group F spoils.
Lippi, who led them to the World Cup trophy in 2006, said he was disappointed not to take all three points, but felt his team proved their credentials.
"Italy is right here. We're here tactically, physically, with our hearts, we're here full stop," he said.
"I just regret that we did not get the points we deserved, but sometimes that's what happens, you get less than you deserve.
"The important thing is this was not a decisive game. What is important is that people now realise we are here and have got our act together."
Paraguay coach Gerardo Martini was pleased to hold the reigning champions to a draw.
"We played this game equally against the current world champions," he said.
"To play against such a rival with such skills is a very good sign for us. It gives is a lot of confidence going ahead in this tournament."
Italy had the first sniff of goal after five minutes when the ball bounced kindly for Riccardo Montolivo who shot on the half-volley but it was charged down by Paraguayan defenders.
Lippi's team were in charge early on, making all the running and looking dangerous on the break as the rain poured down.
Vincenzo Iaquinta sent in a teasing cross but Alberto Gilardino couldn't get his head on the end of it as they ramped up the pressure.
Paraguay only started to come alive on 20 minutes, and some good build-up saw Torres have a punt from distance only to see the ball squirm well wide.
At the other end Montolivo, playing in place of injured AC Milan playmaker Andrea Pirlo, broke free down the middle but could only deliver a weak shot that went straight at the Paraguay keeper.
Iaquinta was in the action again soon after and should have done better from inside the six yard box but was hounded off the ball before Alcaraz got the breakthrough by getting on the end of a Aureliano Torres cross.
Italy came out for the second-half without veteran goalkeeper Gianluigi Buffon, who apparently had a lower back problem.
Federico Marchetti replaced him and he was busy early on with Enrique Vera going close on 53 minutes.
Italy though started to take charge and Montolivo got a shot on target before they won the corner that led to the goal.
Simone Pepe curled the ball into the box and Villar failed to connect with his punch, leaving the unmarked Di Rossi to bury it in the back of the net.
The goal proved a tonic and they went close as they pressed for the winner, with Pepe having the best chance, only to see his powerful long range drive kept out by Villar.
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