His future at the club was thrown into doubt in November when he was suspended for two weeks after clashing with fitness coach Nathan Gardiner.
The winger has been in exile with Tottenham's under-21s ever since and emerged as a target for Steve McClaren a few weeks ago as the Newcastle manager bids to strengthen his squad to avoid relegation.
Newcastle had an offer to take the player on loan rebuffed earlier this month as Spurs' chairman Daniel Levy was only willing to countenance an outright sale, the Daily Mail reported. Levy also rejected a 10 million pound bid for the winger.
Tuesday's deal means Townsend becomes McClaren's third signing of the transfer window, which closes within a week, after midfielders Henri Saivet and Jonjo Shelvey.
(Reporting by Simon Jennings in Bengaluru; Editing by Hugh Lawson)
