Historically Paraguay was inhabited by the indigenous Guaraní, a family of hunter-gatherer tribes, culturally close to the Tupí of Brazil. Seventeen ethnic groups belonging to five language groups inhabit Paraguay. Major groups in the Chaco are the nomadic Nivaclé, Lengua, Ayoreo and Chamacoco, whilst in eastern Paraguay the principal groups are the Aché and Mbyá.

Pedro de Mendoza's expedition founded Asunción in 1537, and the city became the most significant Spanish colonial city east of the Andes for nearly 50 years until Buenos Aires was fully established. It declined in importance once it became clear that the hostile Chaco impeded the passage toward the fabled 'City of Gold' in modern-day Peru.

In the early 17th century, Jesuit missionaries created reducciones where the indigenous Guaraní and Europeans developed new crafts, crops and methods of cultivation. By the time of their expulsion in 1767 (because of Madrid's concern that the Jesuits' power had become too great), the Jesuit influence had spread to what is today Bolivia, Brazil and Argentina.

The bloodless revolution of May 1811 gave Paraguay the distinction of being the first South American country to declare its independence from Spain. Since independence, however, Paraguayan history has been dominated by a cast of dictators who have influenced the direction of the country.

Dr José Gaspar Rodríguez de Francia was the first leader of independent Paraguay. Chosen as the strongest member of the Próceres de Mayo (founding fathers), 'El Supremo' was initially reluctant to take charge, insisting he would accept the role only until somebody better equipped was found. That somebody never was found, and he ruled until his death in 1840. Francia sealed the country's borders to promote self-sufficiency, expropriated the properties of landholders, merchants and even the church, and established the state as the only political and economic power. Though is rule was controversial, under it Paraguay became the dominant power on the continent.

By the early 1860s, Francia's successor, Carlos Antonio López, had ended Paraguay's isolation by building railroads, a telegraph system, a shipyard and a formidable army. Paraguay was in a strong position at the time of his death, when power passed to his son, Francisco Solano López. Seduced by his European education, Mariscal (Marshal) López longed to be seen as the Napoléan of the Americas. At his side was the Irish courtesan Eliza Lynch, who had her own fantasies about French high society. Her dream of making Asunción the 'Paris of the Americas' turned her into an unpopular Marie Antoinette figure, and the country rapidly deteriorated under their combined rule.

When Brazil invaded Uruguay in 1865, López jumped at the opportunity to prove his military genius and save the smaller nation from its fate. To send his army to the rescue, permission was required to cross Argentine territory. Argentina's refusal led him to declare war on them, too. With Uruguay quickly overwhelmed by the Brazilians, Paraguay suddenly found itself at war with three of its neighbors simultaneously. The disastrous War of the Triple Alliance had begun and the course of Paraguayan history would be changed forever. Allied forces outnumbered Paraguayans 10 to one, and by the end of the campaign boys as young as 12 years old were fighting on the front lines armed only with farm implements. Paraguay eventually lost half of its prewar population and 26% of its national territory.

The next war wasn't too far away. In the early 1900s and with Paraguay in political turmoil, the Bolivians began to slowly advance into the Chaco, resulting in the eruption of full-scale hostilities in 1932. The exact reasons for the Chaco War are debated, but Bolivia's desire for a sea port (via the Río Paraguay) and rumors of petroleum deposits in the area are often cited as factors.

In the punishingly hot, arid Chaco, access to water was key to military success and the war hinged on the capture and protection of freshwater sources. Paraguay further benefited from a British-built railway line, which allowed them to bring supplies to troops from Asunción. The British had earlier warned the Bolivians to not touch their railway line or risk adding another, more formidable enemy to their list. As a result the Paraguayan troops were able to overcome Bolivia's numerically stronger forces and even advance as far as the southern Bolivian town of Villamontes. With the futility of the war becoming ever more obvious, a 1935 cease-fire left no clear victor but more than 80,000 dead.

Paraguay subsequently entered into a decade of disorder before a brief civil war brought the Colorado Party to power in 1949. A 1954 coup installed General Alfredo Stroessner as president. His brutal 35-year, military-dominated rule was characterized by repression and terror and is the longest dictatorship in South American history. Perceived political opponents were persecuted, tortured and 'disappeared,' elections were fraudulent and corruption became a national industry. By the time Stroessner was overthrown in yet another coup, 75% of Paraguayans had known no other leader.

Stroessner was eventually driven into exile on 3 February 1989 and Paraguay's first democratic elections were held the same year. They were won by the Colorado candidate Andrés Rodríguez, who had masterminded the coup. The Colorados then went on to win every successive election until their grip was finally broken during the historic events of April 2008, which saw Archbishop Fernando Lugo, a man with no prior political experience, elected president of the republic. Campaigning on social reform, an end to corruption and equal opportunities for all, Lugo's power base stemmed from the numerically superior lower classes – his campaign slogan 'Paraguay Para Todos' (Paraguay for everybody) struck the right note with voters. With the Colorado Party in turmoil, there was at last a sense that corruption and social injustice really could be consigned to the dustbin of history.

President Lugo's government viewed social and economic progress as one and the same, and actively sought closer trade links with neighboring countries. Lugo's relationship with Evo Morales and the late Hugo Chávez brought criticism from his opponents, but marked improvements at the domestic level kept his critics at bay. In 2010 Paraguay had the third-fastest-growing economy in the world, a successful renegotiation of the highly unfavorable contracts for the Itaipú Dam had been completed – ensuring that Brazil would pay Paraguay a fair rate for its electricity usage – and at last the country was beginning to move away from the bottom of the international corruption tables.

There were obstacles, however, and Lugo's election had come at a price. To form a government he was required to broker an uneasy alliance with several political parties, the largest of which, the Liberals, provided his vice president Federico Franco. From the outset the relationship with the Liberals in general – and Franco in particular – was a tense one, as the party demanded ever-increasing influence in government. To complicate matters further, the Colorado Party retained a majority in the senate (which must approve new government policy) and used this power to pressure for their own demands.

Following a breakdown in relations in 2012, the Liberal party withdrew its support for Lugo and joined forces with its traditional rivals, the Colorados, to impeach the president. The official reasons given included a breakdown of security and a failure to address the problems associated with land rights. Over 80% of the land in Paraguay is owned by just 1% of the population, and Lugo had promised to address the decades-long social imbalance by providing land for landless campesinos (subsistence farmers). This promise had infuriated the land-owning classes, who accused him of failing to protect their interests, while a lack of progress had also led to the mobilization of campesino groups, pushing for their own rights to be respected. With his future in the hands of a senate dominated by the parties that sought to oust him, Lugo was declared guilty on June 22, 2012, after a shotgun trial. Vice President Franco was sworn in that same day.

The brevity of the trial process, completed in less than 24 hours, raised eyebrows internationally and resulted in accusations of an antidemocratic abuse of process from neighboring countries. The events were officially declared a coup d'état by the trade bloc Mercosur, of which Paraguay is a member, and trade partners Argentina, Brazil and Uruguay all refused to recognize the Franco government's legitimacy. Mercosur suspended Paraguay from the bloc until free elections were held in April 2013, and this position was later followed unanimously by the Union of South American Nations (Unasur). Defenders of the process claimed that Paraguay was exercising its democratic and sovereign rights to govern as permitted in the national constitution, and called the disapproval of its neighbors a modern-day attack by the Triple Alliance, invoking memories of the disastrous conflict that forever changed Paraguay's destiny.

Franco's reign was short and marred by allegations of government misspending. Obliged by law to call elections in 2013, the Liberals, stripped of the support of the allies who had helped them to victory in the previous elections, were soundly beaten by the rejuvenated Colorados. Millionaire businessman, owner of Libertad football club and tobacco magnate Horacio Cartes became the new president.

Though a political novice, Horacio Cartes promised a 'new direction' for Paraguay by improving infrastructure, and he continued the economic upswing by inviting foreign investment. However, he raised suspicions about his intentions when he publicly invited multinationals to 'use and abuse' Paraguay. With frequent corruption scandals linking prominent politicians with the drug trade (called narcopolíticos by the press), the accelerating deforestation of the Chaco and the abandonment of many of the social policies introduced by Lugo, the Cartes government failed to deliver on the promises it made when taking office.