Australia will head to Dallas for a round-of-32 clash with the Group G runners-up - one of Belgium, Egypt, Iran or New Zealand - after finishing second in Group D.
The Socceroos needed a win or draw in Santa Clara on Thursday (Friday AEST) while Paraguay (four points) should be one of the best third-placed finishers ahead of Turkey.
In finishing second, rather than third, Australia also avoid a knockout match-up with heavyweights Germany or France.
Coach Tony Popovic was rewarded for bold selection calls, which included starting Nestory Irankunda and Cristian Volpato - and six total changes to the line-up that lost 2-0 to the United States.
Australia dominated but they could not find their way through a tenacious Paraguay defence, but won't care as they reach the knockouts at back-to-back World Cups for the first time.
In finishing second, rather than third, Australia also avoid a knockout match-up with heavyweights Germany or France.
The Socceroos will eagerly await Friday's matches between New Zealand (one point) and Belgium (two), plus Egypt (four) and Iran (two) that will determine their next opponents.
Popovic called upon Irankunda, Volpato, Connor Metcalfe, Lucas Herrington, Jackson Irvine and Aziz Behich.
Australia were on top early, dominating possession, with the magnificent Jordan Bos aggressive and dynamic as Jacob Italiano's replacement at right wing-back, with Behich starting on the left.
Irvine was imperious in midfield alongside Aiden O'Neill, strong on the ball and in the air, while Herrington, Australia's youngest ever World Cup starter on his tournament debut, was unflappable in defence.
In 58 minutes, Volpato was exciting, linking up with Bos on the right, breaking into little pockets and troubling Paraguay's defence.
Irankunda, who replaced Mohamed Toure, toiled hard as a back-to-goal striker and caused flashes of chaos.
In the fourth minute, Bos found Volpato who cut back for Irvine to force a save from Orlando Gill at his near post.
Volpato went on a wonderful run into the box in the 12th minute and arguably could have gone down under contact, while he teed up Bos for a shot that was saved in the 36th.
In first-half added time, Bos found Volpato on the overlap and the winger cut onto his left and forced a save.
Irankunda wanted a penalty in the 49th minute, but it wasn't forthcoming.
Paraguay had their first shot on target a minute later through Mauricio, but Patrick Beach comfortably claimed it.
Bos made terrific runs into the box in the 83rd and 90th minutes, but fired one straight at the South Americans' goalkeeper and the other wide.
Mauricio forced Beach into an added-time save, while Socceroo Tete Yengi was denied a chance to be the hero at the death.
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