The Selecao dominated the last-eight contest from start to finish but could not make the breakthrough in normal time, with the host nation needing penalties to advance to the final four after a goalless draw.
The host nation had two shots of their own in the period that followed - Paraguay goalkeeper Roberto Fernandez first denied Roberto Firmino before keeping out an attempt from Allan, who was in for the suspended Casemiro.
Brazil were enjoying plenty of the ball as the first half progressed. Chances were few and far between, though, with Paraguay's back five making it difficult for Tite's side to find space.
Los Guaranies had a golden chance to take lead in the 29th minute when Derlis Gonzalez found space at the far post, but a mixture of the post and a hand from Alisson managed to keep the ball out of the net.
Brazil had close to 70% of the ball in the opening 45 minutes, but it was another poor first half for the Selecao, who struggled to create openings in the final third, leaving the two teams level at 0-0.
Philippe Coutinho had the first attempt of the second period after working space in a dangerous position, but Fernandez was on hand to make another comfortable save between the Paraguayan sticks. Arthur then struck over the crossbar from distance as the Selecao raised the tempo.
Brazil were initially awarded a penalty in the 54th minute when Fabian Balbuena brought Firmino to the ground, but the referee soon reversed the decision following a VAR check, with the contact taking place just outside the box.
It was not all good news for Paraguay and indeed Balbuena, though, with the West Ham United centre-back ultimately picking up a red card for what was a last-man tackle on the Liverpool forward. Alves eventually took the resulting free kick from just outside the box and sent his effort narrowly wide of Fernandez's post.
The Paraguay goalkeeper then had to keep out a strike from Arthur in the 70th minute before Willian replaced Allan in the host nation's second change of the quarter-final.
Brazil had an incredible chance in the period that followed as the ball fell kindly for Gabriel Jesus inside the Paraguay box, but the Manchester City forward somehow missed the post from close range.
Firmino then nodded wide of the goal before Everton Soares had a strike deflected, with Tite's side contining to force the issue as the match headed towards a penalty shootout.
Fernandez made another brilliant save to keep out a close-range Firmino header in the 89th minute, before Willian hit the inside of the post with a low strike moments later.
Paraguay also had their moments on the counter-attack late on, but the two teams could not be separated at the end of seven minutes of additional time, meaning that the last-eight contest headed for a penalty shootout despite the best efforts of Brazil in the second 45 minutes of action.
Paraguay got off to the worst possible start in the shootout as Gustavo Gomez missed his spot kick, allowing Willian to hand the Selecao an early advantage.
Firmino missed Brazil's fourth spot kick to open it up once again, but when Gonzalez fired Paraguay's final effort wide of the post, Gabriel Jesus stepped forward and sent Tite's side into the semi-finals of the competition.
BRAZIL (4-2-3-1): Alisson; Alves (Paqueta 86'), Marquinhos, Silva, Luis (Sandro 46'); Allan (Willian 71'), Arthur; Everton, Coutinho, Gabriel Jesus; Firmino
PARAGUAY (5-4-1): Fernandez; Piris, Gomez, Balbuena, Alonso, Arzamendia (Valdez 61'); Gonzalez, Sanchez (Escobar 78'), Ortiz, Perez (R Rojas 75'); Almiron