The club, third from bottom in the table, had put Connor in temporary charge after Mick McCarthy's sacking last week while they looked for a new manager before handing over the reins to him for the remaining 13 games of the season.
"Since we made the difficult decision to part company with Mick, we have been through a diligent process of assessing potential candidates," chairman Steve Morgan said on the club website.
"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."
Those who have turned down the job, according to widespread reports in the British media, include former Charlton Athletic manager Alan Curbishley, ex-Rangers and Everton boss Walter Smith and Steve Bruce, who recently left Sunderland.
Instead, the task of engineering top-flight survival has been given to a man who has been at the club for 13 years and has served under four different managers.
"This is a decisive step, which creates certainty, and the players are fully behind it," Morgan said.
"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."
One of England's top clubs in the 1950s, winning the title in 1954, 1958 and 1959, Wolves later fell as low as the fourth division in the late 1980s before climbing back to the top.
They had one season in the Premier League in 2003-04 before returning to the second tier until McCarthy took them back in 2009. They started this season well, winning their opening two games but have won only three league matches since then.
Wolves travel to Newcastle United for a league game on Saturday.
