López was the son of poor parents, reportedly of Indian and Spanish descent. After attending the San Carlos Seminary in Asunción, he taught there until it was closed by the dictator José Gaspar Rodríquez de Francia. López, who had married into one of the country's leading families, was exiled to his estancia (ranch). In 1841, a year after Rodríguez de Francia's death, López became the principal of the two consuls ruling the country. Governing Paraguay constitutionally until 1844, he then suspended the constitution and dismissed his fellow consul, making himself dictator. An exceedingly corrupt ruler, who owned half his country's land and never bothered to make a distinction between his own and his country's revenue, he placed most of Paraguay's commerce in the hands of his family.

López was credited, however, despite his dislike of foreigners, with trying to stimulate his country's economy by encouraging European artisans and professionals to immigrate to develop industry and the army. He was also somewhat more lenient toward his political opponents than was his predecessor, and in 1844 he released all political prisoners. He officially abolished slavery and torture, though both were still prevalent at his death. Harsh toward the clergy, he nevertheless attempted to improve elementary education.

López established diplomatic relations with many European powers and with the United States, but under him Paraguay's relations were never smooth. Difficulties with the United States almost resulted in war, and Lopez interfered in the Argentine civil war of 1845–46, when the Argentine president Juan Manuel de Rosas refused to recognize Paraguay's independence.