With the rebellions in the provinces, the army became increasingly important in Brazilian political life. Pedro insisted they stay out of domestic politics, but his policy of diverting the generals by allowing them to control foreign policy ultimately led to the disaster of the war with Paraguay (1864-70). Although Brazil emerged victorious, it was at a dreadful cost. The War of the Triple Alliance is one of history's forgotten conflicts, but it was the bloodiest war in South American history, with a casualty list almost as long as that of the American Civil War: Brazil alone suffered over 100,000 casualties.

It pitted, in unequal struggle, the landlocked republic of Paraguay, under the dictator Francisco Lopez , against the combined forces of Brazil, Argentina and Uruguay. Although the Paraguayans started the war, by invading Uruguay and parts of Mato Grosso in 1864, they had been sorely provoked by Brazilian meddling in Uruguay. The generals in Rio, with no more rebels to fight within Brazil, wanted to incorporate Uruguay into the empire; Paraguay saw Brazil blocking its access to the sea and invaded to pre-empt a Brazilian takeover, dragging Argentina reluctantly into the conflict through a mutual defence pact with Brazil.

The Brazilian army and navy were confident of victory as the Paraguayans were heavily outnumbered and outgunned. Yet the Paraguayans, for the first time, demonstrated the military prowess that would mark their history: united under the able leadership of Lopez, the Paraguayan army proved disciplined and fanatically brave, always defeated by numbers but terribly mauling the opposition. It turned into a war of extermination and six terrible years were only ended by the killing of Lopez in 1870, by which time the male adult population of Paraguay is said to have been reduced (by disease and starvation as well as war) to under twenty thousand, from over a million in 1864