Holding is among the Gunners players who are deemed surplus to requirements under Mikel Arteta, a list that also includes the likes of Nicolas Pepe, Cedric Soares and Albert Sambi Lokonga.
The centre-back is attracting significant interest with Palace joining Luton and Spanish side Real Mallorca in the race on Deadline Day.
Luton have also been linked with Lokonga, while Portuguese full-back Nuno Tavares has left Arsenal to join Nottingham Forest on a season-long loan deal that includes the option for a permanent transfer next summer.
Palace is Holding’s favoured destination and he is considered a low-cost option with less than a year left to run on his current contract at the Emirates Stadium.
Holding played 24 times for Arsenal last season as he deputised in defence following William Saliba’s back injury.
Arsenal’s performances dipped with him and Gabriel in the backline as Manchester City went on to win the Premier League title race.
Arteta has since left him out of all three of Arsenal’s 20-man matchday squads in the top-flight so far this season, giving January arrival Jakub Kiwior a more prominent position and moving midfielder Thomas Partey into a defensive role.
Arsenal haven’t fully ruled out making further incoming moves before the transfer window shuts at 11pm BST on Friday but are happy with the business done so far to sign Declan Rice, Kai Havertz, Jurrien Timber and David Raya. They face Manchester United at the Emirates on Sunday.