Castillo will join the club on a season-long loan from Red Star Belgrade, but the move could be made permanent at the end of the loan.
The 27-year-old spent last season with Everton.
Castillo told the club’s official website: “I’m very happy to be joining Wolves.
“It’s another chance for me to prove myself in England.
“Hopefully after the internationals I will get quickly settled into the squad.
“I know Nenad very well and that makes it easier when you arrive at a new club that you know someone in the team.
“I’ve been at teams at the top of the table in Ecuador and then with Everton last season but I’m looking forward to the challenge of trying to help establish Wolves in the Premier League.”