The centre-leftist opposition leader captured 41 percent of votes to beat ruling party candidate Blanca Ovelar by 10 percentage points, official results from 92 percent of polling stations showed.
Ovelar, the first woman to run for president in Paraguay, conceded defeat on Sunday night as tens of thousands of Lugo's supporters packed a central square in the capital Asuncion.
"You've decided that Paraguay will be free and independent," the 56-year-old Lugo shouted to the jubilant crowd. "We've made history with these elections!"
Deafening firecrackers resounded throughout the city and hundreds of cars honked their horns to celebrate the downfall of the world's longest-ruling party still in power.
A smiley, gray-bearded man who often wears sandals, Lugo inspired Paraguayans fed up with conditions in the poor South American country widely known for corruption and contraband.
"We're letting off steam after 61 years of suffocation. I never saw the Colorado Party lose power. Finally, I see them in the dumps, where those thieves and rats should have been long ago," said Marcelo Corvalan, a 26-year-old student.
Lugo left his post as bishop three years ago, saying he felt powerless to help Paraguay's poor. He then launched his political career the following year and led a centre-left coalition into the presidential election, vowing to stamp out corruption and ease inequalities.
Some of his critics have tried to link him to criminals who kidnapped and killed a former president's daughter, but Lugo has denied any connection to the crime.
LEANING LEFT
