Martino also took Paraguay to the second round of the World Cup last year in South Africa.
Paraguay fell 3-0 to Uruguay in Sunday's final of the Copa America, the South American championship.
The Argentine said he was resigning because he was unsatisfied with the team's progress since the World Cup. Martino was a candidate to take over the Argentina national team, but that post will be filled by Alejandro Sabella, the former Estudiantes coach.
Reports in Paraguay say Martino will be replaced by Francisco Arce, coach of Paraguay club Rubio Nu.