The move had been widely expected after the sacking of Wolfsburg coach and sports director Felix Magath late last month as Volkswagen, owners of the club, are eager to see the 2009 Bundesliga champions back on track.
Wolfsburg are 16th in the league, four points above a relegation spot.
"Klaus Allofs has helped mark the development of Werder Bremen for over a decade and celebrate sporting success here," Bremen board chief Willi Lemke told reporters.
"That is why we gave in to Klaus Allofs's request to deal with the transfer to Wolfsburg."
Allofs's first order of business is to find a replacement for Magath although interim coach Lorenz-Guenther Koestner has had a good run with his team winning three of four games since he took over in both the league and German Cup.
"With this step to Wolfsburg it is the end of 13 important years for me," Allofs said. "During this time I always had other offers that did not matter but now is the time to seek out a new challenge."
Former Germany international Allofs had a successful spell at Werder, attracting talented young players including Brazilian Diego, who now plays for Wolfsburg, and Claudio Pizarro, to the club and then selling them for a much higher price.
During that time Werder won the domestic league and Cup double in 2004. They won the German Cup again in 2009 as well as qualifying for the Champions League for several years in a row. They also reached the 2009 UEFA Cup final, losing to Shakhtar Donetsk.
The club have had to rein in costs after missing Champions League qualification for two straight seasons, selling several key players in the summer and announcing a 13.9-million-euro loss in recent days.