The world No. 3's victory kept her hopes of progressing to the WTA Finals knockout stage alive heading into the final set of round robin matches.
Gauff will face world No.1 Aryna Sabalenka in her third and last match in Group Steffi Graf, and she will likely need to win to give herself a chance of reaching the semi-finals.
In her 3-6, 7-6(4), 2-6 loss to Pegula in Riyadh, Gauff served an alarming 17 double faults and won only 28% (15 of 53) of her second serve points.
This proved costly as Gauff was broken nine times - and seven times across the two sets she lost.
Against Paolini, Gauff double-faulted only three times and won a stellar 75% (15 of 20) of points behind her second serve.
The 21-year-old landed 60% of her first serves and won 67% (20 of 30) of her first serve points as she was broken only once in the match.
This vastly improved serving was the platform for Gauff's comfortable win, and she also excelled on return as she broke Paolini four times in the Italian's eight service games.
In her on-court interview, Gauff said: "I'm really happy with how I played today, it was definitely a turnaround from my first match.
"It's the beauty of this tournament that you have another chance to prove yourself. And yeah, hopefully I can do well in my next one to give myself a chance to stay in this tournament.
"I was just trying to play relaxed. I played a WTA Finals where I lost all three matches, so [I was] determined to not make a repeat of that.
"I knew that today's win was important to keep myself in the tournament. If I lost, I would've been out"
Asked what she was happiest with about her performance, Gauff did not hesitate to pick her serve.
"Definitely the serve, I thought I served smart. Yeah, I think overall, return, everything," said the two-time Grand Slam champion.
The American also sent a warm message to Paolini, who is also competing in doubles at the WTA Finals.
"Yeah, I don't know, I don't think Jasmine was 100% today, so I would like to give her well wishes in her next few matches here. Playing singles and doubles is not easy."