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."
"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.
