"Dun" refers to grayish-brown color; Shakespeare uses this word to describe women's breasts the way they are, with all the imperfections she has, without creating a typical model of female beauty.
"Damask'd" refers to velvety pink scented damask rose; the poet uses this word to say that his mistress doesn't have rosy cheeks as damask roses in the garden and continues with a realistic description of her body.
Explanation:
In his "Sonnet 130", Shakespeare uses these two words to highlight the contrast between the typical model of female beauty and a realistic description of his beloved one. With this sonnet, he tries to explain that our beloved one does not have to be perfect to draw our attention and make us fall in love with him/her.
It is also called Paronomasia. It´s a play on words that produces a humorous effect by using a word that suggests two or more meanings or by using similar sounding words with different meanings. The humorous effects depend upon the ambiguities the words involved.
