Sarabia has joined on a two-and-a-half-year contract to become Julen Lopetegui's third signing since replacing Bruno Lage as manager in November.
Wolves have paid PSG £4.4m for Sarabia's services.
Sarabia joined PSG from Sevilla in the summer of 2019 and made 31 Ligue appearances during his time at the Parc Des Princes, scoring 11 goals.
He spent last season on loan at Sporting Lisbon but leaves France as a two-time Ligue 1 winner.
Wolves have already brought in Matheus Cunha from Atletico Madrid and Mario Lemina from OGC Nice to help their fight against relegation.
Lopetegui's side are 16th on the Premier League table, just two points above the relegation zone.
Sarabia has won 26 caps for the Spain national team, scoring nine goals and was part of their squad at the 2022 FIFA World Cup in Qatar, where he made one appearance.
Sarabia and Lopetegui have already worked together at youth and senior level with Spain.
The 30-year-old could make his debut against Manchester City this weekend.
