The former Olimpia trainer will have less than two months to lift spirits of the struggling nation before they travel to Argentina for a vital World Cup qualifier
The 52-year-old was contracted by the Paraguayan FA from local giants Olimpia, where he enjoyed a successful 12 months in charge.
The coach led the Decano to the Clausura title in 2011, before missing out on a second championship in an agonising last-day defeat to Cerro Porteno in the 2012 Apertura.
Speaking to reporters on Wednesday in his first press conference as coach, the former Nacional, Universidad de Chile and Alianza Lima boss spoke of his delight in taking charge of the Copa America finalists.
"A dream is being fulfilled," he explained.
"I am grateful for the trust placed in me and together with my team we will start work straight away, because the road that awaits us is very tough."
Arce was fired from the post after less than a year in charge after Paraguay slumped to a World Cup qualifying defeat at the hands of Bolivia in June.
The reverse leaves the Albirroja in the penultimate position of the Conmebol standings, with only Peru below the struggling side.
Pelusso becomes the ninth Uruguayan at the helm of the Paraguayan senior team. the most recent being Anibal Ruiz, who managed the side between 2002 and 2006.
His first match will come on August 15, a friendly against Guatemala; followed by a crunch away qualifier against Argentina on September 7.