The 'Magpies' initially signed Townsend in 2016 as they looked to avoid relegation from the Premier League, before he left after their status was not secured.
It is thought that Rafa Benitez is an admirer of the former Tottenham man, and he wants to beat Leicester to his signature.
However, Palace are in no need to sell, having Townsend tied down on a five year contract, and he has made 39 appearances for them over two seasons.
If he were to sign, he would become Newcastle's third signing of the summer, following Martin Dubravka and Ki Sung Yeung.