The Swans suffered a first home defeat since August as Nottingham Forest maintained their unbeaten away record.
A 35th minute David McGoldrick strike proved to be the decisive strike following a strong start by the home side.
Paulo's side had chances before the opener while substitute Lee Trundle came close to levelling late on.
Craig Beattie returned following his three-game absence to spearhead the Swans' attack.
The Scottish striker had been out of action since late November but was back in place of Austrian front-man Besian Idrizaj.
There were also two changes in midfield where Joe Allen and David Cotterill were replaced by Andrea Orlandi and Cedric van der Gun respectively.
The visitors included two former Swansea City loanees in their squad - Paul Anderson started out wide while striker Nathan Tyson, who played 11 games for the club in 2001, was on the bench.
Swans:Dorus de Vries; Angel Rangel, Ashley Williams, Alan Tate(C), Fede Bessone; Leon Britton (Gorka Pintado, 77'), Andrea Orlandi, Darren Pratley, Cedric van der Gun (David Cotterill, 59'), Nathan Dyer; Craig Beattie (Lee Trundle, 53').
Not Used:David Cornell (GK), Albert Serran, Joe Allen, Jordi Lopez.
Forest: Lee Camp, Nicky Shorey, Wes Morgan, Kelvin Wilson, Paul Anderson (Gareth McLeary, 87'), Chris Cohen, Chris Gunter, David McGoldrick (Nathan Tyson, 67'), Paul McKenna (C), Dele Adebola (Dexter Blackstock, 74'), Radoslaw Majewski.
Not Used: Paul Smith (GK), Luke Chambers, Lewis McGugan, Robert Earnshaw.
Attendance: 16,690 Away: 899
Referee: S Hooper (Wiltshire)
The sun was beating down on the Liberty Stadium for the start of this table-topping clash and it was the home support that were making themselves heard following a positive start from their side.
Paulo's side had more of the ball and created the game's first clear cut effort with just four minutes gone.
Andrea Orlandi was brought down by Chris Cohen 25-yards from goal but the free-kick was drilled wide by the returning Craig Beattie.
The Swans had an ever greater chance three minutes later, Orlandi again involved as he sent Cedric van der Gun on his way down the left, the Dutch winger cut inside and blasted his effort across Lee Camp's path but just past the upright.
Forest rallied and Dele Adebola won his side a corner off the legs of Angel Rangel shortly before the half-hour - the initial crossed was half cleared but the return ball was headed goalwards by Kelvin Wilson, but Dorus de Vries was placed to make the save.
The deadlock was almost broken 18 minutes in following Orlandi's persistence to win a corner on the left-hand side.
His delivery was cleared back to his path via the chest of Alan Tate and the return ball, which deflected onto the crossbar by Wes Morgan, fell comfortably for Ashley Williams at the back post, unfortunately the Wales international was leaning backwards and was unable to hit the target with his header.
The action immediately transfered to the other end as Radoslaw Majewski picked out David McGoldrick in the heart of the area, his header was on target but de Vries was at hand to make the save.
Despite a dominating start Forest 'keeper Lee Camp wasn't tested until just before the half-hour mark when he was forced into making two fine saves.
The first came as Nathan Dyer went searching for the bottom corner only for the ex-Derby stopper to push the ball away from goal, while 60 seconds later made himself large to deny van der Gun from close-range after the Dutchman played a fine one-two with Beattie.
But 10 minutes before half-time the hosts suffered a set-back when Forest took a surprise lead through David McGoldrick.
The visitors were awarded a free-kick toward the right of goal, the ball was spread to the left channel where it was delivered into the box where it landed at the feet of Wes Morgan.
His off target attempt was cleared to McGoldrick who had plenty of time to control and find the bottom corner with the aid of a deflection off Ashley Williams.
The Swans picked themselves up to go searching for a leveller before the break, and they were handed a chance on 39 minutes when Morgan was penalised for bringing down Beattie outside of the area. Orlandi placed the ball, cleared the wall with his effort but saw the ball fall just the wrong side of the post.
Half-Time: Swans 0 Forest 1
Nathan Dyer was certainly repeating his Man of the Match performance from Tuesday night, and inside the first minute of this second period he rolled three Forest challenges before being brought down by Aston Villa loanee Nicky Shorey, the defender receiving the game's first booking in the process.
Andrea Orlandi saw a right-sided corner pushed iinches over the bar by Camp while Darren Pratley's deep cross got the better of the Forest 'keeper on 52 minutes but Craig Beattie, who was at the back post, was unable to connect.
It was to be the Scottish striker's final involvement as he was replaced by Lee Trundle who became the Swans' new lone striker, and it wasn't long before he was joined on the pitch by David Cotterill, the winger coming on for Cedric van der Gun.
The second-half was a completely different affair to the first, the Swans struggling to play the fluid style of football they normally like to do.
That killer pass just wasn't being delivered, and loanee David Cotterill resorted to shooting from distance 20 minutes before the end - the Swans' first clear attempt this period.
Gorka Pintado was thrown on in place of Leon Britton for the final quarter of an hour, but just before that Trundle came inches from curling in an equaliser, his well struck effort from the right-hand side of the area beating Camp but not the upright.
Former Swans Paul Anderson saw a weak shot stopped by de Vries but a moment of magic from Trundle three minutes from time almost brought a leveller - the striker turning three defenders on the edge of the box but firing wide of Camp's near post.
Trundle was also handed a chance deep into injury-time as he volleyed way over the top of goal after Orlandi's free-kick had been cleared to complete a miserable afternoon for the Swans.