The 51-year-old takes over from Dean Saunders, who was sacked following Wolves' relegation to League One earlier this month - the same day Jackett quit as manager of Millwall.
"I am both proud and delighted to have been appointed head coach at Wolves, and am really looking forward to the challenge ahead," Jackett told Wanderers' official website.
Jackett was in charge at The Den for almost six years, guiding Millwall to promotion to the Championship in 2010 and keeping them there despite one of the smallest budgets in the division.
He will now be hoping to repeat the trick with Wolves, who have suffered back-to-back relegations and will begin next season in the third tier for the first time since 1989.
Jackett, a former Watford winger who won 31 caps for Wales, led Millwall to the FA Cup semi-final last month but their Wembley defeat by Wigan was marred by crowd trouble among Lions fans.
He has also managed the Hornets and Swansea, who he took to promotion from League Two in 2005.