To suspend Paraguay from the 35-member organization would not serve OAS objectives of restoring good governance, ensuring fair elections and a return to normal conditions in the landlocked country, OAS Secretary-General Jose Miguel Insulza said.
Lugo's speedy impeachment and removal from the presidency was met with disapproval of other regional organizations, including Mercosur and the Union of Arab States. The Paraguayan Congress accused Lugo of failure to control political unrest after a riot that left 17 people dead and appointed Vice President Federico Franco as president.
OAS membership is important for impoverished Paraguay as the association serves as a conduit for aid from the United States and other international aid-giving governments and agencies. OAS brings together all 35 independent states of the Americas and has 67 states and the European Union as observers.
Insulza ordered an investigation into the events, rejecting calls for Paraguay's immediate suspension. In a report to the OAS Permanent Council following a fact-finding mission to Asuncion last week, Insulza said he favored a more active OAS presence in Paraguay to "avoid exacerbating the divisions within Paraguayan society and the country's political system and avoid causing unnecessary suffering among the people of Paraguay."
The permanent council held a special meeting to receive Insulza's report, which will now go to the member states' foreign ministers and other senior officials.
Insulza said OAS looked to Paraguay for an early return to normal conditions and to hold elections next year.
OAS aims to "strengthen governance in Paraguay in the transition to the 2013 elections by promoting public dialogue and supporting the legal reforms that may help avoid further crises," Insulza said.
He said the organization would "ensure that the electoral process is participatory and transparent, and that there are no reprisals or exclusions because of what happened, especially reprisals against President Lugo or his supporters."
New president Franco is yet to be recognized by neighbors as well as regional organizations Mercosur and Unasur.
Differences over how to handle the crisis in Paraguay widened after regional leaders met in a summit in Mendoza, Argentina, soon after the impeachment and Lugo's removal.
Mercosur backed Lugo and a statement from the group condemned his removal as a "legislative, congressional or institutional coup" in which the former president was denied time to defend himself against an "express" impeachment vote.
Unasur also protested Lugo's removal, asserting the move against him didn't respect due legal process.
Paraguay says Argentina, Brazil and Uruguay have ganged up on the new government and want Paraguay expelled from the OAS.
The political crisis has thrown Paraguay's dysfunctional economy into further disarray, not helped by Venezuela's decision to cut off oil supplies Paraguay receives on reduced and deferred payment bases.