Wolves had been assessing their options for a number of weeks and sounded out candidates, including former West Ham manager David Moyes.
Pereira quickly became the frontrunner and joins having won Primeira Liga titles with Porto in 2012 and 2013 and the Greek Super League with Olympiakos in 2015.
He had been in charge at Al-Shabab since February and leaves them sixth in the Saudi Pro League.
The 56-year-old succeeds O’Neil, who was appointed at Molineux in August 2023, with Wolves having lost 11 of their 16 Premier League games this season.
They have won just twice, against Southampton and Fulham, with their seven-year stay in the top flight under threat.
Wolves chairman Jeff Shi said: “Vitor is a highly respected and experienced coach who has achieved success across different leagues and will bring a new approach for the test ahead.
“This is a challenging moment for the club, and we want to thank Vitor for taking on this responsibility.
“We have full confidence in his ability to guide us back on track, alongside the players and staff, and the entire club will be united in supporting him to achieve success.”
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