The conditions were poor due to torrential rain and the pitch was extremely slippery.
Italy started well and controlled the first 20 minutes without ever really creating any danger. Paraguay began nervously, but slowly grew in confidence to open up.
At the midway point of the half there were the first chances for both sides. First, Riccardo Montolivo pounced on an Enrique Vera error, but shot straight at Justo Villar.
Then, down the other end, the ball broke to Aureliano Torres on the edge of the box but he scuffed wastefully wide.
Italy continued to dominate possession, but it was Paraguay who broke the deadlock against the run of play on 38 minutes. A free-kick was whipped in from the right and Alcaraz rose above Fabio Cannavaro and De Rossi to head home into the bottom corner.
Italy suffered a further blow at half-time as goalkeeper Gianluigi Buffon was forced off injured and replaced by Federico Marchetti.
Vera blazed over for Paraguay, while Pepe’s attempt at a bicycle-kick went all wrong as the slow tempo from the first half continued in the second.
Paraguay had an excellent opportunity to double their lead on 54 minutes as a poor defensive clearance put Vera in on the right and the midfielder fired just wide of Marchetti’s near post.
Italy were struggling badly to create and Lippi introduced Mauro Camoranesi just shy of the hour-mark in exchange for Claudio Marchisio.
Camoranesi seemed to inject a spark into the Azzurri, and on 63 minutes Lippi’s men were level. Pepe's corner was completely missed by Villar, and De Rossi showed determination to turn the ball home from inside the six-yard box.
Montolivo had a penalty appeal soon after, but the referee correctly waved the protests away.
Italy had a spring in their step, but Paraguay could have regained the lead on 66 minutes as substitute Jonathan Santana miscued wide from a good position. Roque Santa Cruz then entered the fray to add to the South American hopes.
The Azzurri threw on Antonio di Natale, while Benfica star Oscar Cardozo came on for Paraguay as both sides went for the win.
Pepe cut in from the left and unleashed an effort 25 yards out, but it was easy for Villar. Montolivo then had a better shot from further out, and Villar did well to turn the ball around the post.
Italy did all the attacking in the closing stages, but a draw in the end was probably about fair.