There was a "pointedness" about the exchange between the two tabloid editors Ambi Sitham, a media lawyer, said.
Ms Sitham was giving evidence at the trial of Brooks on phone hacking and other allegations.
Speaking by videolink from the United States,she said she was at a birthday dinner party in a steak restaurant in Balham, south London, for Andy Coulson, another defendant in the trial, in January 2003.
She said Mr Morgan and Brooks were both very busy.
"They were engaged in some banter about their respective front covers.
"Basically, Piers said to Rebekah that he already knew what her splash was going to be. He said 'I already know what your splash is, or your cover is, because I've been listening to messages'."
Asked by prosecutor Andrew Edis QC how Brooks responded, Ms Sitham said: "She retorted, 'been hacking into my phone again, have you, Piers?'
"He said something like, 'well you've been looking at my emails' or something. It was quite a quick back and forth of bantering, I just know what I heard.
"It was her saying to him, 'you've been listening to my messages', he said, 'you've been looking at my emails' and her saying 'I've left a false trail'."
Asked how they appeared, she said: "There was a pointedness to it."
She was sitting next to Brooks and opposite Mr Morgan.
Former spin doctor and News of the World editor Coulson, 45, from Charing, Kent, and former News of the World and Sun editor Brooks, also 45, of Churchill, Oxfordshire, are accused of conspiring with others to hack phones between October 3 2000 and August 9 2006. Ian Edmondson, 44, of Raynes Park, south west London, and former managing editor Stuart Kuttner, 73, of Woodford Green, Essex, face the same charge.
Clive Goodman, 56, from Addlestone, Surrey, and Coulson face two allegations that they conspired together and with other unknown people to commit misconduct in public office between August 31 2002 and January 31 2003, and between January 31 2005 and June 3 2005.
The trial continues.