Connor, who was assistant to the sacked Mick McCarthy, will be in charge for the remaining 13 games.
He will be at the helm for the first time in Saturday's Barclays Premier League clash at Newcastle.
Former Leeds, Brighton and Portsmouth striker Connor has been at the club for 13 years and served under four different managers.
Wolves chairman Steve Morgan said: "Since we made the difficult decision to part company with Mick, we have been through a diligent process of assessing potential candidates.
"Having spoken to a number of people, we have drawn that process to a close and myself and the board are unanimous that Terry is the right man to lead the club for the remainder of the season.
"This is a decisive step, which creates certainty, and the players are fully behind it.
"As a club, whether that be staff or supporters, we now all need to unite behind Terry and the players and secure as many points as possible over the next 13 games."
Morgan and chief executive Jez Moxey were at Wolves' Compton training ground on Friday to speak to players and staff of their decision.
Source: PA
Source: PA