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.
Ms Sitham, speaking by videolink from the United States,said she was at a birthday dinner party in a steak restaurant in Balham, south London, for Andy Coulson, another defendant in the trial, on a week night in January 2003.
She was with her then-boyfriend, a publicist, who was a close friend of Coulson.
She said Mr Morgan and Brooks were both very busy.
"At the time they were both editors of quite big national tabloid newspapers, and they were both very busy trying to finish off the last details of their front covers, or splashes, for their newspapers. 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, I've led you up the garden path'."
Asked how they appeared, she said: "It was pointed. There was a pointedness to it."
Ms Sitham, who moved to America last year, said she is a qualified solicitor, although she no longer practises.
She worked for law firm Schillings in London from 2000 to 2005 and was involved in helping people take legal action against media outlets.
There were 18-20 guests at the dinner, who were sitting at a long, narrow table.
She was sitting next to Brooks and opposite Mr Morgan, and Claudia Winkleman was also there.
Ms Sitham knew who Brooks was, but had not met her before. She had met Mr Morgan before, but not Coulson.
She had been involved in the case of supermodel Naomi Campbell against the Mirror, and Mr Morgan and Ms Sitham discussed the case.
Brooks was "very lovely and very welcoming and very nice".
"She said we should keep in touch, and swap details, so if there were cases in future, we could try and settle it a bit more amicably."
Ms Sitham described Coulson's birthday dinner as "a very relaxed, intimate gathering" with the "most powerful people in the media industry in the UK".
"These people had all climbed the ladder together," she said.
Ms Sitham told the court that Brooks had suggested they keep in touch after the dinner.
"I thought it was a good idea as I was beginning to take more responsibility at work," she said.
Ms Sitham told the jury she went to give her telephone number to Brooks.
"Piers turned to me and said 'Careful - she'll tap your phone'," she told the court.
"She saw my expression and said 'Don't worry, let me give you my number instead'," Ms Sitham added.
Brooks then crossed out her number, claiming it was her husband's, and gave Ms Sitham another, she told the court.
Cross-examined by Clare Sibson, representing Brooks, Ms Sitham agreed that her case involving Naomi Campbell was described as "the privacy action of the decade".
Asked whether Piers Morgan, then editor of the Mirror, knew she was involved in Ms Campbell's case,
Ms Sitham replied: "Yes, I had met him anyway separately to that."
Asked whether she believed Mr Morgan and Brooks' alleged exchange was serious, Ms Sitham answered: "It was entirely serious. I remember being uncomfortable.
"There was a certain expression and energy," she added.
"There was a certain look in their eyes. There was a certain tone."
Ms Sitham told the court she was "definitely a little bit concerned" after Mr Morgan claimed Brooks would "tap" her phone.
"I wasn't sure how serious the threat was," she said.
Ms Sibson said to Ms Sitham that accessing her phone calls, which would have involved high profile clients with cases against media groups, would have been "a serious breach of privacy".
"The truth is this conversation didn't happen did it?" Ms Sibson said.
"It did," Ms Sitham replied.
The witness sent a "humorous" card to Brooks after the dinner in which she talked about working together in the future, the jury was told.
The jury was shown a blog post, first published in March 2012, in which Ms Sitham referred to the alleged conversation between Mr Morgan and Brooks as having been "stored away".
"I did not realise the extent or significance," she wrote.
She came forward after a meeting with actor and privacy campaigner Hugh Grant, Evan Harris from pressure group Hacked Off and Guardian journalist Nick Davies, the court heard.
"One of my fears to be honest about this was losing friends and being seen as being a snitch," Ms Sitham told the jury.
"I would be cutting off people both professionally and personally in a way that would be very upsetting to me."
Asked by Ms Sibson if her "whole exercise" was to "publicise herself", Ms Sitham replied: "I don't believe going through this entire process has given me anything other than a stomach ulcer, loss of friendship and sleepless nights.
"I still maintain I'm doing the right thing."
Brooks and Coulson deny the charges. The trial continues.