Andy Coulson, also British Prime Minister David Cameron's former communications chief, was aware private investigator Glenn Mulcaire had offered to "monitor" the phones, former royal editor of the tabloid Clive Goodman said while giving evidence.
Coulson agreed to extra payments of 500 pounds a week to Mulcaire, he said.
Both Goodman and Coulson, two of seven on trial, deny conspiring to commit misconduct in public office.
Goodman said he had told Coulson in October 2005 that Mulcaire was offering to monitor the three phones.
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During what is his third day in the witness box, Goodman told the court he had no budget of his own and he had had to ask Coulson to agree to the payments.
Coulson had consented to "a two-month trial" of payments from the editorial management budget, he added.
The trial is about illegal payments to public officials, allegations of attempts to hide potential evidence and phone hacking and the illegal interception of messages.