The quarter-final at Ellis Park exploded into life in the second-half with both goalkeepers saving spot kicks before Spain striker David Villa pounced in the 83rd minute to keep his team in with a chance of lifting the trophy for the first time.
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Villa is now the tournament's top scorer with five goals.
"It's a good moment for Spanish football," said coach Vicente del Bosque, who now has to plot a repeat of Spain's 2008 European championship final win over Germany knowing they will have to raise their game to match their sparkling opponents.
It was tough for Paraguay, playing in their first World Cup quarter-final, after they succeeded in nullifying Spain's talented strike-force and created chances of their own, defying predictions of an easy workout for the European champions.
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Looking distinctly underwhelmed by their illustrious opponents, Paraguay's beanpole striker Oscar Cardozo combined well with his nippier partner Nelson Valdez to create a string of half-chances. Valdez even had the ball in the net after 41 minutes but Cardozo was ruled offside in the move.
Paraguay's manager Gerardo Martino was proud but frustrated.
"We gave our all, we had opportunities, but unfortunately Spain converted and Paraguay didn't," he said. "We didn't have luck with us. It was a game we could have won. Now we have to resign ourselves to this tough blow."
PENALTY FLURRY
Before Villa popped up witht he winner, the game appeared headed for extra time after both sides had missed from the spot in an extraordinary flurry of activity that woke up the 55,359-strong crowd early in the second period.
First, referee Carlos Batres ruled Spain defender Gerard Pique had hauled down Cardozo in the penalty area.
The striker sent his spot-kick low to the left of Iker Casillas but Spain's captain and goalkeeper saved comfortably.
Moments later at the other end, Spain were awarded a penalty after Villa went down under a challenge from Antolin Alcaraz.
Xabi Alonso netted high to Justo Villar's right, sparking celebrations on the Spain bench, but the referee made him retake the penalty kick after players from both sides encroached.
Alonso struck his next attempt low to Villar's left but this was also saved. In the aftermath, substitute Cesc Fabregas, on for ineffective striker Fernando Torres, appeared to be brought down by the keeper but the referee awarded a corner.
With both sides pressing for a late winner, Spain substitute Pedro hit the post following a brilliant run by Andres Iniesta.
Villa picked up the rebound and struck a right-foot shot that rema
