Despite dominating large periods of the match and creating several clear chances, Germany failed to convert their chances, forcing the game to penalties.
In the shootout, Germany missed two spot-kicks, while Paraguay held their nerve to secure a famous victory.
This defeat means Germany have now lost a penalty shootout at the FIFA World Cup for the first time in their history.
Since making their tournament debut in 1934, they had never been beaten from 12 yards in 92 years of World Cup participation.
The exit continues a worrying trend for German football.
Having failed to reach the quarter-finals in 2018, 2022, and now 2026, questions will once again be asked about the direction of the national team following their 2014 triumph.