The Welshman has quit his role as coach of Doncaster Rovers in order to take over at Molineux, despite having led the Yorkshire side to second in League One.
Saunders inherits a team in considerably worse shape, with Wolves languishing in 18th in the Championship and having been knocked out of the FA Cup courtesy of defeat to non-league Luton Town last time out.
Doncaster chief executive Gavin Baldwin also confirmed Saunders' departure on the club's official website, but remained confident of sustaining the push for promotion.
|12/1||Wolves are 12/1 to be relegated from the Championship with bet365|
"Work has already started on trying to find a replacement for Dean and to continue our push for promotion back to the Championship.
"I have spoken with Dean to thank him for the fantastic job he has done here at Doncaster and wish him well for the future."