The stunning exhibit outside St Peter's Collegiate Church, Lichfield Street, was commissioned as part of British Art Show 9 which is bringing the best of UK art to the city.
Artist Kathleen Fabre used neon wool create To Heaven and Back which were stretched from the tower roof to the street level railings.
However, devastated church staff discovered on Wednesday morning the strands had been cut to shreds by vandals.
Creative Black Country commissioned the rainbow installation. The organisation's marketing manager Kerry O'Coy said: "We are all really upset this beautiful art installation has been vandalised.
"It had been a year in the planning and for someone to destroy it is really awful. It is even more upsetting because the piece was about inspiring hope and diversity so was a really positive thing for Wolverhampton."
She added: "It looked spectacular and the reaction we have been getting has been amazing, there have been hundreds of comments and countless people uploading pictures on social media.
"So for something so beautiful, which took so much hard work, especially from the artist Kathleen, to be the target of vandals is really sad."
Stafford-based artist Kathleen has created three other rainbow installations throughout Wolverhampton but was particularly proud of the St Peter's Church piece.
She told the Express & Star: "There was always a chance this could happen, it was a bit exposed I suppose.
"But it will take more than a vandal to keep me down, I'm coming back fighting. I am going to rise above it, literally, because my next piece at the church will be higher up so no-one will be able to vandalise it."
She added: "I just cannot leave it on a down feeling, there has to be a resurrection. I know a lot of people are angry and sad about this, and lots of people were planning journeys to St Peter's Church so I cannot let the vandals win."
The University of Wolverhampton alumni artist wanted her pieces to be a "vibrant greeting to visitors, commuters, residents as they arrive into or walk around the city centre".
Kathleen's other rainbow installations are Read Between the Lines outside the Central Library, in Snow Haill; Making Connections at Lighthouse Media Centre’s main entrance, at the Chubb Building, in Fryer Street; and Lines of Enquiry at Wolverhampton University's School of Art courtyard garden, in Station Road.
OffSite 9 was commissioned by Creative Black Country as part of Arts Council England’s Creative People and Places scheme, and supported by Wolverhampton based health and wellbeing company Paycare.
The project, which runs until April, is designed to bring art to a wider audience.
In the Bible the rainbow was created by God as a promise to humans earth would never be completely flooded by water again.
Kathleen added: "The rainbow a symbol of hope, holds many interpretations, all positive. So there is no way I will not resurrect the St Peter's Church rainbow!"