Stroessner, 93, had lived in Brazil since he was toppled in military coup in 1989 after ruling Paraguay for 34 years.
"He has just died," a spokesman for the Santa Luzia hospital said on Wednesday morning.
Stroessner, the son of a German immigrant and a Paraguayan peasant, had been in intensive care for several days after a hernia operation.
In Asuncion, the government said it did not plan to honour him.
Jose Nicolas Morinigo, a senator from the Solidarity Country party, said the country was "finally turning a page in history, putting a physical end to the dictatorship".
Stroessner, the grandson of the former president, said a funeral service would be held in Brasilia, and the family would decide later whether to bury him Paraguay.
Born on November 3, 1912, Stroessner graduated from military college and rose to become commander-in-chief in 1951 at age 38.
He seized power in a military coup in 1954 after 27 years of political chaos during which 22 presidents had come and go in the poor, landlocked country.
"He acted according to the times of the Cold War. It was a different world then"
Alfredo Stroessner, the grandson of the former president
He gained a reputation as an iron-fisted leader that was staunchly anti-communist.
Corruption and human rights abuses were rampant during his rule in an era when repressive military leaders, often with US backing, held power in many Latin America countries.
Human rights group say at least 900 people disappeared and thousands were tortured as Stroessner snuffed out dissent.
"The degree to which people felt subject to persecution if they were in any way opponents of the regime was very, very intense," said Sebastian Brett, a senior researcher with Human Rights Watch.
A different world
Stroessner's family said he felt little remorse for his government's abuses and heavy-handedness.
"He acted according to the times of the Cold War," his grandson said in Brasilia. "It was a different world then."
Paraguay long enjoyed US support by giving Washington unflagging diplomatic support. But relations began to deteriorate in the late 1970s because of Washington's criticism of its human rights record and harassment of the opposition.
Stroessner was also criticised for providing a haven for Nazi war criminals, notably Josef Mengele, known as the "Angel of Death", the chief doctor at the Auschwitz death camp who died in the mid-1980s in Brazil.
Paraguay became increasingly isolated after 1982 as many neighbouring countries returned to civilian rule.
Street demonstrations early in 1986 were put down by police and in 1987, civilian gangs with chains and wire whips broke up opposition meetings.
Two years later, General Andres Rodriguez, a former political ally, toppled Stroessner in a coup on February 3, 1989.
Stroessner fled to Brazil, where he spent the rest of his days living in an umpmarket residential area of Brasilia. He never returned to Paraguay, where he faced charges of homicide and torture.