Smith is understood to have held talks with Wolves owner Steve Morgan and chief executive Jez Moxey about taking the post until the end of the season after emerging as the favourite to step into the breach
The 63-year-old has been out of football since ending his second spell in charge of Rangers at the end of last season but has declined the opportunity to return to management in the Barclays Premier League.
Several bookmakers had made Smith the clear favourite to take over from McCarthy, who was sacked 11 days ago.
Wolves have endured a fruitless search in the past few days with Alan Curbishley, Reading's Brian McDermott and Brighton's Gus Poyet all rejecting their interest.
Former Sunderland boss Steve Bruce appeared to be the favourite after being interviewed last week.
But Smith then moved into pole position and Wolves had even been hopeful of him being in place for Saturday's clash at Newcastle.