"I know Nenad very well, and it makes it easier when you arrive at a new club that you know someone in the team."
Wolves manager Mick McCarthy said he was delighted to secure Castillo's services.
"Segundo has good experience, having played in the Premier League for Everton and made 42 international appearances for Ecuador," he stated.
"He also played for two seasons at Red Star Belgrade with Nenad. He will certainly add quality to the squad."
Prior to his temporary move to Everton, Castillo scored 18 goals in 72 appearances for Red Star and helped them to a league and cup double in his debut season in 2007.
He enjoyed a successful early career in his homeland with Club Deportivo Espoli and then El Nacional.
He is Wolves' eighth new signing of the summer following the capture of Milijas, Marcus Hahnemann, Kevin Doyle, Andrew Surman, Greg Halford, Ronald Zubar and the loan signing of Chelsea's Michael Mancienne.
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