Released from his Atletico Madrid contract, Costa could now be set to resurrect his career at Wolves, who boast a number of players represented by his agent Jorge Mendes.
But former Chelsea striker Cascarino believes there are plenty of warning signs with a deal for Costa, warning Wolves they could live to regret their decision.
Cascarino told TalkSport: “I think it's a very dangerous fit, if I'm honest. Because of the experience he had at Chelsea and the way he wanted to leave the club, the way he disappeared.
“Obviously it then turned sour at Atletico and he became a real problem, he played relatively little football this year, he's only played seven games and got a couple of goals.
“I don't know if I could trust him, or trust what he's going to be like if he came to the football club.
“If I was getting the Diego Costa who turned up at Chelsea, followed Didier [Drogba], was a real handful – great! The fans loved him at Chelsea, you'd hear his name all around the stadium, he was their favourite player.
“But the way he handled it, I would be very suspicious of a 32-year-old whose contract has been ripped up.
“You could argue that Eric Cantona left Leeds United in a very sour way, and Manchester United and Sir Alex Ferguson got an unbelievable player who played his best football… but I'm not sure Diego Costa has that same mentality.
“It's the kind of high risk move that if it comes off you're a genius, but if it falls flat you're an idiot for taking him. Nuno would have to handle a very difficult player.
“If Diego Simone felt Costa still could have done a job for Atletico Madrid, he would have been desperate to keep him.
“But Atletico are still in the Champions League and they have a chance to win the LaLiga title, Costa wants to rip up his contract and the club has agreed. That rings alarm bells, for me."