The former billionaire arms dealer and one-time confidant of Middle Eastern potentates is now being sued for the money - plus interest thought to total around pounds 5m - by London Ritz Casino Limited.
The court heard that Mr Khashoggi, the brother-in-law of Harrods owner Mohamed Al Fayed, gambled pounds 10.1m during a nine-week period between the end of January and the start of April 1986 at the roulette wheel.
At first he was successful and his cheques were honoured but his luck at the tables changed and 16 cheques for pounds 200,000 each, drawn on an account with the Swiss Banking Corporation of Geneva on three days at the end of March and on 10 April, were refused on presen tation because of "insufficient funds".
But Mr Khashoggi claimed that the debt was legally unenforcable because he had an agreement with the casinos management which effectively allowed him to continue gambling on credit - said to be illegal under Section 16 of the 1968 Gaming Act.
This is the latest public airing of the affairs of Mr Khashoggi, who became fabulously wealthy from comparatively modest beginnings, and was, for a while, seldom out of the headlines.
An international Mr Fixit with lucrative connections, most of his money was made from commissions paid on sales of aircraft and arms to the Middle East, especially Saudi Arabia, by Western companies.
With wealth came all the trappings of success - homes in Europe, the Middle East, the United States and East Africa; a private DC9 jet and a yacht, named after his daughter Nabila, which became a byword for ostentatious luxury.
In 1961 he married Soraya, who grew up in a Leicester council house as Sandra Daly. When they divorced in l974 she sued her husband for half his fortune, estimated then at pounds 2.4bn. But she did not get to continue enjoying the trappings of wealth and a few years ago was discovered living in a three-bedroomed house in Hungerford, Berkshire.
Mr Khashoggi's business dealings continued to attract controversy. His company, the Triad Corporation, faced serious difficulties and the grand executive toys, the jets and the limousines, faced being impounded.
At one point the tycoon ended up in an American jail, accused of helping Ferdinand and Imelda Marcos dispose of some of their Filipino loot.
Mr Khashoggi survived his ordeal and, after a lean period, was once again in the news last year when he was said to be involved in a bid to buy into a company which controlled Italy's motorway network.
Yesterday at the High Court, Nicholas Merriman, QC, for the Ritz, said that between 1986 and 1990, Mr Khashoggi made repeated promises to pay back the money but claimed that he was having financial difficulties - he was involved in a US Congressional hearing over the Irangate affair and in criminal proceedings against himself and Imelda Marcos.
In 1990 a New York jury cleared him of conspiring with Mrs Marcos to buy $360m of property in Manhattan with allegedly stolen Philippine funds.
"When these proceedings were out of the way the managing director of the company sent him a fax in July 1990 saying 'now can you turn your attention to paying this debt' and he did not and proceedings started the following year," said Mr Merriman.
Mr Khashoggi, who was once estimated to be worth pounds 2.4bn, gambled at the Ritz Casino on 13 occasions, the court heard.
"All prior cheques were honoured," he said. "During this period Mr Khashoggi was initially successful and it was only in later stages that he lost and those are the cheques that were drawn to meet the gambling that was unsuccessful," he added.
"On 10 April 1986 Mr Khashoggi bought chips worth pounds 1.2m. He recouped most of it.
"The chips in his hand resulted in us sending a cheque for pounds 900,000 to his bank and pounds 100,000 in a cheque which he then cashed. His cheque to the casino for pounds 1.2m was dishonoured."
But Mr Khashoggi's defence was that he had an understanding with unnamed casino managers that his cheques would not be met on presentation because he was awaiting funds due to him in the aftermath of the Irangate affair.
The cheques were therefore a "sham" and non negotiable because he was being allowed to gamble unlawfully on credit.
Mr Merriman said that after that time Mr Kashoggi stopped gambling at the Ritz Casino.
"But he continued gaming substantially at Aspinall's and Maxim's and indeed on 28 March, the day when he came to the Ritz and drew cheques for pounds 600,000 which he lost, on that same day he went to Maxim's and drew cheques in favour of that casino for pounds 500,000 which, as far as we know, he paid.
"Subsequently he gambled in November 1986, also at Maxim's, where he seemed to lose nearly pounds 3m which he seems to have paid," Mr Merriman said.
"We do not know why we were not paid."Reuse content