custom template display custom post type using custom permalink page 2 not found

I have a custom template name blog it display custom post type Item it is working using a permalink default or Numeric but my desire permalink is /%category%/%postname% and the problem is happen. the next page or should I see the page/2 is page not found.

php

<?php
        if (have_posts()) : {
        $paged = (get_query_var('paged')) ? get_query_var('paged') : 1;
        query_posts('showposts=2&post_type=Blog'.'&paged='.$paged);} ?>

        <ul class="adviceLandingPage">
          <?php while(have_posts()) : the_post(); ?>

          <li>
          <a href="<?php the_permalink(); ?>" id="post-<?php the_ID(); ?>">
            <?php if ( has_post_thumbnail()) the_post_thumbnail('post-thumbnails'); ?>
            <span class="title"><?php the_title(); ?></span>
            <span class="excerpt"><?php $excerpt = get_the_excerpt(); echo string_limit_words($excerpt,20); ?></span><br />
            <span class="readMore">Read More</span>
          </a>

        </li>

        <?php endwhile; ?>
        <li>
          <?php posts_nav_link(); ?>
        </li>
        </ul>
        <?php endif; ?>

I hope someone light up my way to the correct explanation why this problem occur is there any went wrong with my code.