The 24-year-old has agreed a five-year contract with his transfer coming on the same day that striker Dwight Gayle moved in the opposite direction.
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"I'm extremely delighted," Townsend told Palace's website. "I had chats with the manager [Alan Pardew] and chairman [Steve Parish] before I signed and I'm pleased to be part of Crystal Palace's future.
"By the sounds of things it's going to be a bright one and I can't wait to get started."
Townsend, who joined recently-relegated Newcastle for the same fee from Tottenham in January, surpasses the £10million spent on Yohan Cabaye last summer.
He scored four goals in 13 appearances for Newcastle, earning a call-up to England's initial squad for Euro 2016.
Townsend is expected to play on either wing, where the talented Wilfried Zaha and Yannick Bolasie are regulars, and where Jason Puncheon also vies for selection.
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Gayle scored 26 goals in 74 appearances for Palace since arriving at Selhurst Park in a £4.5million deal from League One side Peterborough in July 2013.
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