Down 0-2 after losing the first two singles to the home team, Sitak and Venus rallied to take a convincing 3-6 6-3 7-6 (8-6) 6-3 win in 2 hours and 30 minutes.
The defeat for Paes and his partner meant that the 43-year-old Indian stalwart could not overtake Italian Nicola Pietrangeli for most wins in doubles in Davis Cup history. The two players are tied on 42 wins.
India had taken a 2-0 lead on day one with Yuki Bhambri and Ramkumar Ramanathan winning the first two singles.
Tomorrow Ramkumar will take on Finn Tearney before Yuki takes on Jose Statham in the final rubber of the tie.
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Paes and Vardhan started in style and raised the 4000-strong capacity crowd's hopes at the Shiv Chatrapati Sports Complex by clinching the opening set in 28 minutes by breaking Venus in the sixth game.
With the momentum having shifted to the visitors, it was no surprise when they got an early service break, in the second game of the fourth set when Vardhan dropped his serve, before closing out the set and the match.
In the first set Vardhan served a couple of aces in succession to dig his way out of trouble. Paes followed suit with a fine return of serve before clinching the point with a cross court winner to break the Kiwi's serve at 15 that put the hosts 4-2 ahead.
The lowly ranked Vardhan, given timely tips by Paes, did not let go of the advantage and went up to 40-0, the Kiwis fought their way back to 40-30 but had no chance when the 29-year-old Indian served a timely fourth ace to close out the set.
The Kiwis, both ranked higher than the Indian duo in doubles, hit back by clinching the second set in 31 minutes, one break of serve off Paes's delivery in the fourth game that gave them a 3-1 lead doing the trick.