Smith made 172 appearances for Leeds between 1998 and 2004 before joining arch-rivals Manchester United for a £6million transfer fee after Leeds were relegated.
A possible return for Smith has Leeds fans divided.
Grayson says he has not yet decided whether he will be approaching the Magpies.
Simon Grayson: "He's a good player and forget any affinity he has with the club in the past.
"If you get a player of Alan Smith's ability then obviously you would have to be interested. We are in the market to make us better.
"We've been linked with many players. Smith, Woodgate, Kaka, Messi! Smith is a good player, Woodgate is a good player and we want good players at this club.
"They have fantastic footballing ability, experience and know-how.
"No one knows if Alan Smith is available. Alan Pardew is the only one. I have not asked that question.
"Whether I intend to, we will have to wait and see where we go with it."
Should Newcastle sell Smith? Vote in our poll.