A girl that is so ugly you have to put a paperbag over her head while having sex so that you aren't disgusted.
Girl: Am I your little princess?
Guy: Of course you're my princess...My paperbag princess!
A girl who is really beautiful and has a great body but doesn't necessarily dress the part.
Usually a hippie, or an accomplished woman who doesn't care about the latest fashion trends or other materialistic crap.
She's my paperbag princess.
Translation: She's beautiful inside and out, and doesn't feel like she has to wear tight brand name jeans to show the whole world her curves.
Much like a butterface. A girl who has a great body, but a rather unattractive face. She'd be great in bed, but you just have to cut holes out of a paperbag and pop it right over her head.
GUY 1: "Hey look at that Nancy girl. Nice ass"
GUY 2: "Yeah, but look at her face."
GUY 1: "She's a real paperbag princess alright."
GUY 2: "Nice one."