The former Scottish international, who was previously in charge of five English clubs including Aston Villa and Blackburn Rovers, replaces Italian Walter Zenga, who was sacked last week after only 87 days in charge.
"We are delighted that Paul has agreed to become our new head coach," Wolves' main director Jeff Shi told the club's website (www.wolves.co.uk).
"He arrives at Wolves with extensive managing experience at different levels, in recent years in the Premier League and the Championship."
Wolves dropped into the bottom six after losing 3-2 at home to Derby on Saturday.
(Reporting by Steve Tongue; Editing by Ian Chadband)
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