The npower Championship club have moved quickly to replace Stale Solbakken after the Norwegian's ill-fated reign came to an end with a 1-0 defeat to non-league Luton in the FA Cup on Saturday.
Saunders began his management career with Wrexham in the Blue Square Bet Premier before taking over at Doncaster.
A statement on Wolves' official website read: "Wolves are delighted to confirm that Dean Saunders is to become the club's new manager.
"Compensation has been agreed with Doncaster Rovers to allow the 48-year-old to take over at Molineux following Saturday's departure of Stale Solbakken."
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