Palace also announced the signing of French goalkeeper Steve Mandanda on a free transfer from Olympique Marseille.
Townsend, who just missed out on inclusion in England's 23-man squad for Euro 2016, has signed a five-year deal at Selhurst Park, the London club said.
The 25-year-old former Tottenham Hotspur winger only signed for Newcastle last January in a bid to secure regular first-team football and save the club from relegation from the Premier League.
Townsend scored four goals in his 13 appearances at St James' Park.
News that makes sense
Your trusted source for staying up-to-date with the world around you. Get free daily news updates and analysis, straight to your inbox.
"It was a pretty easy decision to choose Crystal Palace because of the direction they’re heading," he told the Crystal Palace website.
"They play a system that suits wingers and you only need to look at Wilfried Zaha, Yannick Bolasie and Jason Puncheon to see how they’ve excelled and how influential they are for Palace. I want to be a part of that and help this club reach its potential."
Gayle, 25, has signed a five-year deal. He has been Palace's top scorer for the past three seasons, netting 25 times despite finding his first-team opportunities restricted at Selhurst Park.
He is Rafa Benitez's second signing this summer, following the arrival of Gent goalkeeper Matz Sels.
(Reporting by Neil Robinson, editing by Ed Osmond)
