Robinho put Brazil ahead after 15 minutes, but Derlis Gonzalez’s penalty midway through the second half ensured normal time finished 1-1 and took the game to penalties.
Everton Ribeiro and Douglas Costa both missed from the spot as the Selecao suffered a repeat of their shoot-out loss to the same nation at the same stage four years ago.
Both sides deployed 4-2-2-2 formations from the outset, but Brazil settled into their rhythm the quickest.It took less than two minutes for Dunga’s men to register a shot on target as Coutinho’s effort from range forced goalkeeper Villar to tip the ball over his crossbar.
In the middle of the park, Elias – who had received the ball from Robinho – played a pass wide right for Dani Alves, whose probing cross eventually fell back to an unmarked Robinho, who had a straightforward tap-in.
Coutinho was giving Paraguay all sorts of problems on the left wing but he almost produced a magical moment just prior to the half-hour mark on the right byline.
With Bruno Valdez trying to shepherd the ball out for a goal-kick, Coutinho somehow kept it in and played a ball back across goal – only for the linesman to adjudge the ball had crossed the line.
Benitez continued to push Brazil on the left side, with Dani Alves yellow-carded for a foul on him five minutes after the interval.
Paraguay’s push to get back into the match saw Paulo da Silva power a header at Brazil goalkeeper Jefferson, who parried it clear in the 62nd minute – but Diaz’s men were level with 18 minutes to play via Gonzalez.
Both goalkeepers were called upon in the final stages – Gonzalez firing an acute-angle strike at Jefferson, before Coutinho’s dipping shot made Villar work.
But neither could create a decisive second goal, as a shootout ensued – and Brazil suffered penalty heartbreak again, meaning Paraguay face Argentina in the semi-finals.