I understand the irrationality of $\sqrt{2}$ in the following way:
To prove: $\sqrt{2}$ is irrational
Proof: Assume $\sqrt{2}$ is rational.
i.e. $\sqrt{2}=\dfrac{a}{b}$
Assume $a$ and $b$ are co-prime
...... (the usual steps)
Hence $a$ and $b$ cannot be co-prime.
This contradicts our second assumption.
So first assumption is wrong.
So $\sqrt{2}$ is irrational.
MY CONFUSION:
We are making two different assumptions. This is not the way proof by contradiction works. If the second assumption gets contradicted, for what reason will the first assumption be false?
The second assumption can be avoided if it bothers you. You can say:
Suppose $\sqrt 2=\frac{a}{b}$ ($a,b$ not necessarily co-prime).
Let $c=\frac{a}{(a,b)}$ and $d=\frac{b}{(a,b)}$, where $(a,b)$ denotes the highest common factor of $a$ and $b$.
Then $\sqrt 2=\frac{c}{d}$, and $c$ and $d$ are co-prime.
Now proceed with the proof as above, with $c,d$ in place of $a,b$.