The midfielder joins after progressing through the Manchester City set-up and earning a call up to England’s under-19 group.
Born in Guinea, Diallo grew up in Rotherham and was snapped up by City’s Academy at the age of 13, remaining there until this summer.
Last season Diallo played his part in City’s route to the UEFA Youth League semi-finals, where they were beaten 5-4 by Barcelona.
On Monday Diallo turned out for Wolves’ under-23s as Rob Edwards’ men defeated Newcastle United 2-0 and he’ll be included in the squad to face Norwich City on Friday.