The authority has earmarked a plot of land in Gorsebrook Road, Whitmore Reans, for the site, which will cater for up to 13 traveller families at one time.
The plans have led to a furious response from residents in St Peter's ward, who have demanded the council finds another spot in the city.
It has now emerged that the council has less than three months to sign off on a new site, as failure to do so would jeopardise an injunction banning illegal camps in the city.
A three-year High Court ruling blocking camps at 60 sites in Wolverhampton comes up for review in December, at which point its impact will be examined.
It is understood that officers fear the court will lift the injunction unless "demonstrable progress" has been made on a transit site, after a judge raised concerns about travellers having nowhere to go in the city.
WATCH: Council give background on transit site plan
"There is a real worry that the injunction will not be carried over unless we have agreed on a transit site," a council source told the E&S.
The injunction was applied for after it emerged that dealing with illegal traveller camps had cost the council more than £500,000 across 2016 and 2017.
Sites including East Park and Windsor Avenue Playing Fields have been blighted by illegal camps, with travellers leaving piles of rubbish and damaging gates.
Under the injunction anyone illegally occupying any of the protected sites can be arrested and imprisoned, fined or have their assets seized.
Bosses say it enables the council to evict travellers encamped on protected sites more quickly, and saves taxpayers' money being spent on court proceedings and clean-up operations.
Residents in Whitmore Reans have launched a campaign against the development, saying it will destroy nature, lead to increased traffic in the area and cause house prices to slump.
The plot, which is the size of a football pitch and is covered in trees, was earmarked for a nature reserve 12 years ago but the plans fell through.
It had been an old quarry that was used as a landfill site in the 1970s, although a recent ground survey found it to be free of pollutants.
Bosses claim it is the most suitable spot in the city after ruling out Shaw Road, Fowlers Park and Showell Road, which had all been considered.
The E&S understands that planning bosses have requested a fresh environmental assessment of the site.
A public meeting is due to take place to discuss the proposals at the Holiday Inn, Wolverhampton racecourse, on Monday night.
A petition against the plans has been signed by hundreds of people. View the petition here.