O'Neil has been given a three-year contract at Molineux and will start his reign against Manchester United at Old Trafford on Monday.
The 40-year-old has been chosen as a replacement for Julen Lopetegui, who reached an agreement to terminate his contract with Wolves on Tuesday.
O'Neil himself was sacked by Bournemouth in June despite steering the Cherries to Premier League safety with a 15th place finish.
Wolves sporting director Matt Hobbs said: "We're delighted to welcome Gary to the club. He's a highly motivated young coach with strong principles and very well thought of by everyone he has worked with, and we're excited to see what we can achieve together at Wolves.
"Our players have shown their quality during pre-season, and I believe Gary and his team will continue to coach and improve them and will have success working with this group.
"Everyone at Wolves is looking forward to welcoming Gary, offering him their full support and working collaboratively to help the club to keep pushing forward together."
Wolves have sold Ruben Neves to Al Hilal while Raul Jimenez has joined Fulham.
Matt Doherty's return to Molineux as a free agent is the only notable incoming at the club this summer.
