。
She wrapped it in paper.
Literal
She [topic-は] that [object-を] paper [in-に] wrapped.
包む ('to wrap, to enclose, to envelop') marks the wrapping material with に — the destination/result-state marker for placing or coating. 紙に包む ('wrap in paper'), 布で包む ('wrap with cloth' — で would be the alternative for emphasizing the material as instrument). Wrapping is a culturally loaded action in Japan: gift presentation is a quietly elevated art, and 包む has its own cultural resonance with 風呂敷 (the traditional cloth used for wrapping and carrying objects). The word also has a metaphorical sense — 心を包む ('envelop the heart') for heartfelt actions.