Paddon will look to bounce back from a crash in the season-opening event in Monte Carlo and try to repeat his stunning performance on the snow surface last year when he finished second.
Earlier in the day the New Zealander posted an impressive third fastest time in the pre-event shakedown.
Latvala backed up an impressive debut with the returning Toyota team at Monte Carlo to win the opening test in Sweden. It was the first stage win for Toyota since 1999.
"Everything is more than great," a delighted Latvala said. "Now I just need to hold my horses."
Paddon's Hyundai teammate Theirry Neuville was second fastest 0.6s behind Latvala while Spaniard Dani Sordo was third fastest in another Hyundai.
World champion Sebastien Ogier was fifth fastest - 0.1s behind M-Sport Ford teammate Ott Tanak.
Seven special stages await for the drivers on the first full day of Rally Sweden beginning later tonight.
Stage 1 Results
Jari-Matti Latvala (Toyota) 1:34.1s
Thierry Neuville (Hyundai) +0.6s
Dani Sordo (Hyundai) +0.7s
Ott Tanak (Ford) +0.8s
Sebastien Ogier (Ford) +0.9s
Mads Ostberg (Ford) +1.2s
Kris Meeke (Citroen) +2.0s
Juho Hanninen (Toyota) +2.1s
Elfyn Evans (Ford) +2.1s
Ole Christian Veiby (Skoda) +2.4s
Hayden Paddon (Hyundai) +3.2s
