League leaders Wolves now find themselves with only a two points advantage over Blues who clinched this vital win with goals from Cameron Jerome and Garry O'Connor after they had skipper Lee Carsley sent off in the 37th minute.
Blues, who extended their unbeaten home record to nine games, had to call upon all their experience to chalk up this win which sets up an exciting battle for honours between the two Midland clubs.
Roared home by their best attendance (25,935) of the season Blues' sheer grit and determination earned them the three points after doggedly holding out against Wolves pressure.
The odds were against Wolves even before the game started with leading marksman Sylvan E banks-Blake absent with a calf injury. This enforced change enabled manager Mick McCarthy to draft in on-loan striker Marlon Harewood for his first game since his arrival from Aston Villa.
The skilful Michael Kightly was also missing from Wolves attack and it was clearly evident in the early exchanges that the pattern of play was severely restricted as Blues operated with more determination and endeavour.
But with so much at stake it was not a game for the purists. Neither side could really impose themselves in the first half hour. In such a tightly strung match there were numerous mistakes and fortunately for Wolves Cameron Jerome lacked the skill and finishing power to capitalise upon a bad back-pass by Stephen Ward.
Goalkeeper Wayne Hennessey was alive to the situation and effectively blocked the on-rushing Jerome to the relief of the travelling fans.
Chris Iwelumo, who had previously had a quiet start to the match, suddenly broke through and shrugging off Liam Ridgewell fired in a low shot which the well positioned Mark Taylor was able to comfortably save.
Seb Larsson demonstrated his danger with a free kick which was only just off target with the scrambling Hennessey apparently well beaten.
But the game took a dramatic turn in the 37th minute when a reckless tackle by Blues skipper Lee Carsley on Iwelumo resulted in the former Everton player being given an immediate red card. Iwelumo was himself carried off on a stretcher to be replaced by the Republic of Ireland striker, Andy Keogh.
But it was Blues who took the lead a minute before half time with a controversial goal from Jerome. A free-kick by Stephen Carr was headed on by Ridgewell. Although Hennessey had a hand on the ball Jerome bundled his effort over the line.
James McFadden, who has missed 15 games, came off the substitutes bench to replace out of touch, Kevin Phillips, and cleverly set up a good opportunity for Lee Bowyer only for Hennessey to make an equally smart save to keep Wolves in the game.
McFadden, who appeared to relish the explosive atmosphere, marked his return with a subtle piece of play when he found O'Connor with a 50 yard pass. It was, however, O'Connor's raw determination which carved out his goal as he outpaced Christophe Berra and, with Hennessey out of his goal, rolled the ball home from an acute angle to the delight of Blues fans.