The 24-year-old has scored four goals in 13 appearances on loan at Molineux where his time was due to expire on New Year's Day.
Now Henry - who netted 19 goals in 163 games for the Lions - has signed a two-and-a-half-year contract after the clubs agreed an undisclosed fee.
It means Henry will be available for Wednesday's trip to Tranmere and Friday's game at Gillingham.
Head coach Kenny Jackett said: "An agreement is now in place for us to sign James and we'll do that once the window re-opens.
"He has done very well so far. In terms of his recent performances I think he has been struggling a bit after his groin injury which has hampered him a little.
"But within the games he is able to produce some fantastic crosses and through balls which can create chances and opportunities. Players like that can be hard to come by.
"He now has to make sure he gets himself physically right and 100 per cent and he has the ability down the right-hand side to be a really good player for Wolves."