Roy Hodgson stepped down as Eagles boss at the end of the 2020/21 season with the Premier League club now searching for his replacement.
Reports claim Nuno has been 'in talks' with Palace for a number of days following his departure from Wolves.
Townsend, whose contract expires at the end of June, likes the idea of the Portuguese becoming the next Palace boss, although he believes they could find it difficult to lure him to Selhurst Park.
Nuno is also at the top of Everton's list to replace Carlo Ancelotti, who quit for Real Madrid on Tuesday.
"If it is Nuno, or a manager of Nuno's ilk, then it would be great for the club," Townsend told talkSPORT Breakfast as he reacted to reports of Palace's interest.
"He is somebody who is proven in the Premier League, has taken Wolves up from the Championship, and got them into Europe.
"If it happened, it would be a great appointment.
"But I'm sure there's a long way to go before he's announced. I'm sure they'll be interviewing other people.
"Everton are now in the hunt for a manager, so I fear he may be somebody they look at as well. Unfortunately, there's a lot that goes on before they sign on the dotted line."
Palace have 14 players out of contract this summer, including Townsend, with the club wanting to appoint a new boss before making any decisions on new deals.
Townsend has had offers from abroad but believes, at 29, he has so much more to offer in the Premier League.
He said: "The club are still waiting to appoint a manager and until that happens they aren't going to renew anybody.
"I'm waiting now. I've got an offer through. I'm playing the waiting game. I want to be somewhere on July 1.
"I want to get the offers in, sit down with my agent and family, and see what's best for me.
"I've got offers from overseas but still feel I have much more to offer, I've got so much more in the legs.
"I would love ot stay in the Premier League. I will wait as long as possible, see what else arises, see what the manager at Palace decides, before I make my decision."