"I assume all responsibilities having to do with the fact that I had a relationship with [the child's mother] and I recognise paternity," Lugo said on national television.
The mother of the child, who will be two-years-old next month, later denied signing any complaint and said she had not authorised the lawyers to file a suit on her behalf, Reuters reported.
Election win
Lugo resigned as bishop of Paraguay's central San Pedro province in 2004 after administering there for 10 years.
He announced two years later that he was renouncing the status of bishop to run for president.
He won the presidency last April as head of a left-leaning coalition that ended more than 60 years of one-party rule in the poor South American country.
But the Catholic church initially rejected his application for layman's status, changing its mind and relieving him of his vows of chastity only after he won elections last year.
The lawsuit indicated that Lugo and the child's mother met when he was bishop in San Pedro and that he stayed in the house of her godmother.