The former Bolton Wanderers man found himself on the fringes of Mikel Arteta's squad last season and has been demoted further down the ranks over the summer months.
Gabriel Magalhaes, William Saliba, Ben White, Takehiro Tomiyasu, Jakub Kiwior and the injured Jurrien Timber are all above Holding in the pecking order, and the 27-year-old's contract only runs until 2024.
Moves to Luton Town or Besiktas have been mooted, but according to Express journalist Ryan Taylor, Holding will be swapping the Emirates for Selhurst Park in the coming hours.
The Eagles are supposedly set to pay £4m to sign the former England Under-21 international, and Palace boss Roy Hodgson confirmed his side's interest in Holding during Friday's press conference.
"He is a player who has interested us for a while. Dougie Freedman (Palace sporting director) knows him very well," Hodgson told reporters when quizzed on Holding.
"We're working on the basis that you can't have too many quality players in your squad. If he was available and it's a deal that is doable I'd be very happy to work with him.
"Our squad is not that massive. There is space in the 25-man squad for another player. If it could be Rob we'd be happy with that."
Holding is poised to leave Arsenal having scored five goals in 162 matches since joining from Bolton in 2016, winning the FA Cup and Community Shield within his first year of joining.
The Englishman earned plaudits for his display in the 2017 FA Cup final against Chelsea alongside Per Mertesacker, and he won the tournament for a second time in 2020 before adding two more Community Shield triumphs to his CV.
However, Holding has largely been restricted to Europa League starts and substitute cameos in the Premier League over the past two seasons, making just 14 top-flight appearances last season, six of which came from the first whistle during Saliba's absence through injury.
The 27-year-old is set to become the second player to leave Arsenal on deadline day after Nuno Tavares, who has been shipped out to Nottingham Forest on a season-long loan with a £12m option to buy.
The Gunners could also cut Cedric Soares, Nicolas Pepe and Albert Sambi Lokonga from their ranks in the coming hours, and the latter is believed to be discussing a loan move with Luton.
However, there have not been any serious offers for Pepe, and there are fears that Arsenal may be forced to terminate the Ivorian's deal, four years on from his then club-record £72m move from Lille.
Arsenal are next in action at home to Manchester United on Sunday, and Arteta confirmed at his pre-game press conference that he does not expect any more incomings before the 11pm deadline.