Officers broke up the suspected deal in The Covert, Pendeford just before 3am today.
Police had received information about a group of men 'acting suspiciously' around a Seat Leon.
A 25-year-old man, from Wolverhampton, was found in the car and an axe discovered behind the driver’s seat, while a small quantity of cannabis was also recovered.
The man was arrested on suspicion of possessing an offensive weapon and drugs possession.
Wolverhampton Police posted on Twitter: "Our officers broke up a suspected drug deal in Pendeford at 3am today – and arrested a man after an axe was found in the back of a car.
"Armed police were deployed to The Covert where the 25-year-old was detained on suspicion of possessing drugs and an offensive weapon."