Forlan leads Uruguay to record 15th Copa America
Liverpool attacker Luis Suarez, the player of the tournament, was also on target as Uruguay claimed a first continental crown since 1995 and broke their all-time Copa title tie of 14 which they held with Argentina.
For Forlan, it was an emotional triumph as he followed his father and grand-father into the record books as a Copa America winner.
"This really means a lot for me because my grand-father won it, my father won it and now I have also done it," said the former Manchester United striker, who took his international tally to 31 goals, a record he now holds with Hector Scarone.
"Three generations have won this trophy. The name of Forlan will stay in history."
Suarez opened the scoring in the 12th minute when his drive took a deflection off Dario Veron and left goalkeeper Justo Villar wrong-footed.
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Atletico Madrid star Forlan added the second three minutes from the interval when Egidio Arevalo cleverly intercepted the ball to release the veteran attacker who confidently buried a left-footed strike.
It was Forlan's first goal in 13 matches as Uruguay, who knocked out hosts Argentina in the quarter-finals, were in cruise control at River Plate's famous Estadio Monumental.
Suarez added: "We really wanted this. We are a united group and we deserved it. We had to fight like crazy to win this and we've achieved something great."
Captain Diego Lugano said the win was a triumph for the whole of his country.
"I'm really proud of the way we played and the way we did it. You cannot imagine how I feel. We've made a lot of people very happy."
Uruguay, who were World Cup semi-finalists in 2010, dominated the first half while Paraguay, who had reached the final without winning a game, were desperately short of ideas and inspiration.
They had been fortunate not to have been a goal down as early as the second minute, needing Villar to pull off a sensational, point-blank save to keep out a bullet header from Diego Lugano.
Paraguay, the champions in 1953 and 1979, had defeated Brazil and Venezuela in penalty shoot-outs in both the quarter-finals and semi-finals after the games ended 0-0 in extra-time.
But they came close to pulling a goal back in the 54th minute when Nelson Valdez crashed a right-foot volley off the crossbar with Uruguay goalkeeper Fernando Muslera getting a slight touch to deflect the ball towards the woodwork.
Just moments earlier, Suarez had muscled his way down the left, but his cutback for Forlan dropped just inches behind the Atletico Madrid man as he closed down on goal.
Paraguay again looked dangerous when Ivan Piris charged down the right flank before crossing to Christian Riveros whose flick was saved by Muslera.
Uruguay remained in a positive frame of mind, bringing on prolific Napoli striker Edinson Cavani for Alvaro Pereira after 65 minutes.
Cavani then teed-up Sebastian Eguren 10 minutes later but Villar pulled off a one-handed save despite being off-balance.
Forlan then hit his 31st international goal in the last minute after being set-up by Cavani and Suarez.