"It was just not good enough today; it was not good enough throughout the whole first half of the season," McClaren told reporters after the defeat knocked them out of the German Cup last 16.
"I am disappointed and frustrated. We have hit bottom. The club needs changes now. No one knows what will happen in the next days."
McClaren had called the cup tie with Cottbus a big game, a shortcut towards winning a European spot, but the outcome leaves him fighting for his job at the start of the four-week winter break.
"I need to allow this to sink in," club manager Dieter Hoeness told reporters. "It is not easy to return to your day-to-day business after such a result. I will not sleep well tonight.
"I had booked a ticket for a flight on Thursday which I will not board. This result has turned the holidays upside down. But I will not act without considerable thought."
Former England manager McClaren, in his first season with the 2009 German champions as the first English coach in the Bundesliga, has failed to impress so far despite the club keeping much-sought top striker Edin Dzeko and signing Brazilian Diego from Juventus.
They have not won any of their last seven league matches and, with just 19 points from 17 games, languish in 13th place, some 10 points behind the European qualification spots.
On Wednesday, Wolfsburg, with three strikers in Grafite, Dzeko and Mario Mandzukic, were 3-0 down at half-time when their fans started jeering and chanting: "We have had enough".
"I really have no words to describe our performance," said Wolfsburg defender Marcel Schaefer. "We are in a very difficult situation."
McClaren joined Wolfsburg after steering Dutch side Twente Enschede to their maiden Dutch title. He took over in 2008, seven months after his spell in charge of England ended in humiliation with England failing to qualify for Euro 2008.
