Pelusso replaces former World Cup defender Francisco Arce, who was sacked after his team plummeted to one place from bottom of the South American group.
The 58-year-old Pelusso, who has left Paraguayan first division side Olimpia to take charge of the ailing national team, was picked because of his experience in local football.
“"We wanted a coach who was working in the domestic game. I think he knows the scene and was the only candidate we had," Paraguayan Football Association (APF) president Juan Angel Napout told Primero de Marzo radio station.
“"We're convinced this was the best choice and that we can go out to fight for our qualification. He'll decide who he works with, he's very enthusiastic with this opportunity and we in being able to count on him."
Pelusso could not have asked for a tougher start as Paraguay, with four points from five matches, face a critical game away to Argentina on Sept. 7. They then have a home clash with much-improved Venezuela four days later.
His debut, though, will be an away friendly against China on August 15.
The Uruguayan, who steered Olimpia to the Paraguayan league title last year, is expected to give the national team a sounder tactical base and lean on the experience of players such as Roque Santa Cruz and Oscar Cardozo who had been largely overlooked by the 41-year-old Arce.
Pelusso, who has coached in five different South American countries including his homeland, steered Alianza Lima to the Peruvian title in 2006 and Universidad de Chile to the semi-finals of the Libertadores Cup, the continent's champions league, in 2010.
Arce, whose coaching CV was limited to steering Rubio Nu to promotion to the first division, was a risky bet for the APF after the success of Argentine Gerardo Martino, who steered Paraguay to the last eight in the World Cup for the first time in 2010 and the final of the Copa America in Argentina last year.
Arce was sacked after a 3-1 defeat away to Bolivia in June, despite spending three weeks with his team at high altitude preparing to cope with the rarefied air in La Paz, nearly 4,000 metres above sea level.
Bolivia coach Gustavo Quinteros resigned after the victory, his first in 16 matches in charge, leaving the team equal on points with Paraguay and one above bottom-placed Peru.
Quinteros was unhappy with a recent decision by Bolivia's first division clubs to shorten the length of time the national team coach has with the players.