The forward will be leaving fellow loanee and club colleague Stefan Maierhofer at Ashton Gate after choosing to return and compete for Premier League football.
Iwelumo told Wolves' club website: "I take it as a big compliment that Bristol City took me and wanted to keep me on and that other clubs were interested.
"I went there for a month just to try and get fit and I'm feeling a lot better for it. I'm very grateful to Bristol City for giving me that chance.
"We all know what the Championship is about, it's a very physical league and the games come thick and fast. It allowed me to get my legs and get a couple of goals as well.
"To go out and get some games and feel wanted again and play regularly gives you a massive boost to your confidence."