Mercedes has admitted for the first time that Ferrari are favourites for the world drivers' championship, over a quarter of the season into the 2017 campaign.
Sebastian Vettel leads pre-season front-runner Lewis Hamilton by 25 points heading into the seventh race of the season at the Canadian Grand Prix in Montreal.
Vettel extended his lead in the title race after victory in Monaco as Hamilton was only able to finish seventh, following a poor run in qualifying.
Finnish pair Valtteri Bottas and Kimi Raikkonen are third and fourth respectively, but are not expected to feature in what is still a two-way duel for the title.
Wolff said: "It's painful but we are not the favourites for this year's championship. At the moment, it's Ferrari.
"We need to rise to the challenge to prove we are the team to beat."
Ferrari's resurgence following a major set of rule changes for 2017 follows three years of dominance by Mercedes.
Although Mercedes have proved to have the fastest car in qualifying, the Ferrari is more flexible, works more easily in a wider range of conditions, and has generally appeared to have an advantage in races.
Hamilton has won two Grands Prix, in China and Spain, and his new teammate Bottas won in Russia, which came against the run of play after Ferrari dominated qualifying in Sochi.
Wolff said: "This is the reality of the situation now.
"We have to fight with all that we are worth for every single win, pole position, podium finish, and every point.
"You can no longer expect that when you look at a time sheet the two Mercedes will be right at the top.
"We've come into this season with a strong car that has allowed us to win three of the first six races. But it has also caused us more complications than we have seen in previous years."
With the next Grand Prix in Canada, Wolff also admits things are not going to favour the Mercedes car and has warned fans that they could be in for yet another tough weekend.
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