Alison Bozek, formerly employed by the owner of Harrods, said the occasion "sticks vividly in my mind". She told the jury that she went into Mr Fayed's office and saw his briefcase, in which he kept thousands of pounds in cash, on his desk.
She continued: "He took out a wodge of money and put it into an envelope. His briefcase was in front of him and he had a white envelope, into which he put the money and he scrawled Neil Hamilton's name on the envelope ... Mohamed closed it, gave it to me and said `leave it downstairs for him'. Because I knew it had cash in it, I put it into a brown envelope, put my initials on the seal ... And it was sent downstairs to the porter for collection."
Ms Bozek was giving evidence on behalf of Mr Fayed, who is being sued for libel by Mr Hamilton over allegations that the former MP for Tatton took cash and other benefits in return for asking questions in the House of Commons.
Ms Bozek, who is now a qualified solicitor, told the court that she first met Mr Hamilton at Mr Fayed's offices in Park Lane, central London in either 1986 or 1987. She said she had been introduced by the lobbyist Ian Greer, who had been hired by Mr Fayed to combat a campaign being carried out against him by the Lonrho boss, Tiny Rowland.
Mr Hamilton frequently visited the offices, she said. She had noted 21 appointments for him in the diary, but not every visit would be recorded. There were also telephone calls from Mr Hamilton and his wife, Christine.
Ms Bozek said she first discovered that cash payments were being made to Mr Hamilton after he telephoned and asked whether the "documents" that Mr Fayed had for him were ready. She went on: "I told Mr Al Fayed and he said `yeah, yeah, tell him it will be all right'."
The jury was told that the cash was normally in bundles of pounds 50 notes. She remembered three specific occasions of such payments being made. She continued: "One time he handed me the money and said `count out pounds 2,000, put it in an envelope and leave it downstairs for Mr Hamilton'." On another occasion Mr Hamilton was paid pounds 3,000 just before he and his wife went on a free holiday at the Paris Ritz Hotel, owned by Mr Fayed: "It was clearly spending money for their trip in Paris," she said.
Under cross-examination by Desmond Browne QC, for Mr Hamilton, Ms Bozek repeatedly denied that she had put cash in envelopes for a woman called Francesca Pollard, who had been carrying out a vendetta against Mr Rowland and Michael Howard, the then Home Secretary, with the collusion of Mr Fayed.
Mr Browne accused Ms Bozek of mixing up "a bit of a truth" about cash in envelopes for Ms Pollard, and "then lying" in alleging that it was being paid to Mr Hamilton.
Earlier, Peter Preston, the former editor of The Guardian newspaper, was accused by Mr Browne of giving misleading evidence to the inquiry by the parliamentary commissioner, Sir Gordon Downey. Mr Browne said Mr Preston - contrary to his evidence now - had not told the inquiry that in 1993 Mr Fayed had already revealed to him that cash was being actually passed in brown envelopes. Mr Preston said: "It was a failure of recollection." When Mr Browne put it to him that Mr Fayed had not mentioned anything about envelopes, Mr Preston responded: "The cash had to be paid over in some form anyway, you don't hand over large bundles of cash, the question of envelopes did not seem to me particularly germane at that point. It was obvious that if money was passed over, it was being passed over in envelopes."
The case continues.