The former Wales striker emerged as the preferred candidate of Wanderers, who have moved quickly to replace Stale Solbakken who was sacked on Saturday night after a poor run of form.
In a statement on Sunday night, Doncaster's chief executive Gavin Baldwin confirmed the move.
"I have just come off the phone with Wolverhampton Wanderers' chief executive Jez Moxey, at 8.50pm Sunday evening, and can confirm that Dean Saunders has agreed to take over as manager at Molineux," he said on the club's official website.
"We have agreed a good deal for Doncaster Rovers. Work has already started on trying to find a replacement for Dean and continue our push for promotion back to the Championship.
"I have spoken with Dean to thank him for the fantastic job he has done here at Doncaster and wish him well for the future."
Wolves later released a statement which said Saunders was set to take the job on the proviso that terms could be agreed.
"Wolves can tonight confirm that terms have been agreed with both Dean Saunders and Doncaster Rovers for Saunders to become the club's new manager," said the statement. "The formalities of the move are yet to be completed and a fuller statement will be issued once they are finalised."
Saturday's FA Cup third-round defeat to Luton proved to be the final straw for a Wolves board who have watched Solbakken fail to get a side relegated from the Premier League last season back on track.
With just three wins in 16 they languish in 18th place in the Championship, with the club describing results as "hugely disappointing".
Solbakken, 44, joined the Midlands club last summer following his dismissal by German side Cologne, with the former Wimbledon midfielder - once pronounced clinically dead after suffering a heart attack in training which forced his retirement from playing - boasting five Danish titles won in charge of Copenhagen.
Saunders is Wolves' fourth boss in less than a year after the departure last February of Mick McCarthy and the brief tenure of Terry Connor.
A former Liverpool and Aston Villa player, Saunders got the Doncaster job after Sean O'Driscoll was sacked last season.
He presided over one of the most colourful periods in the club's history which saw them relegated to League One with a squad made up of loan signings, provided primarily by agent Willie Mackay.
The likes of El-Hadji Diouf and Pascal Chimbonda all turned out for Rovers but could not prevent relegation, although Saunders has enjoyed a better time of it this time around, with his team joint-top of League One.
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