According to Mallory's ENCYCLOPEDIA OF INDO-EUROPEAN CULTURE, the
root is *huergh- "commit a crime"
ON vargr "felon, criminal (metaphorically also 'wolf)
OE wearg evil, malignant, accursed, villain
OHG warg devil, criminal
MHG warc monster
OPrus wargs evil
Lith vargas hardship, misery
Latv vargs sick, suffering
OCS (Old Church Slavonic) vragu enemy
Russian vorog enemy, devil
Lith vergas slave
Latv vergs slave
Hit hurkil sin, sexual perversion
TochB warsse highwayman, bandit
"However the meaning 'wolf' in Old Norse seems clearly secondary and the
morphologically exact equation with Baltic and Slavic suggests a more
mundane original meaning of 'evil, criminal' though the Old Norse
equation of 'wolves' with criminals may reflect a conceptual connection
of PIE age."

http://www.delphi.com/nordichistory1
http://www.delphi.com/indoeuropean