Joe Haines, the former political editor, told the hearing that feelings were running high after allegations that Mr Davies was an Israeli spy and an arms dealer.
He said that when a union representative was told of the sacking he said: 'Good. If he had come back here, we would have hanged him ourselves.'
Although no one at the Mirror believed the spy and arms trade stories, Mr Davies allegedly put the newspaper's credibility at risk when he lied about a visit during which he met a dealer in Ohio, the United States, in 1985.
Mr Haines, a former press officer under Harold Wilson at No 10 Downing Street, said the Mirror had no option but to fire Mr Davies. Commons motions had been tabled about his activities and other newspapers were calling him a liar.
But he said he did not believe accusations that Mr Davies had helped sell arms to Iran, had been a Mossad agent or had helped the Israelis abduct Mordechai Vanunu, the nuclear technician.
Mr Haines, cross-examined by Mr Davies, told him: 'I do not believe that you were involved in arms dealing or ever sold a peashooter, let alone a Starfighter F104. I know you spent every day in the office.'
Mr Davies, 55, was dismissed from his pounds 55,000-a-year job last October, shortly before the death of the Mirror's publisher Robert Maxwell. He has since written a book about the Princess of Wales and one about Maxwell's private life. He is claiming he was unfairly dismissed.
Mr Haines said that Maxwell had been angry when he heard another newspaper was going to publish allegations against Mr Davies. 'In an unfortunate phrase, I asked him not to go overboard.' Maxwell drowned two weeks later.
Charles Wilson, editorial director of Mirror Group Newspapers, said he decided Mr Davies should go after a two-hour inquiry when he was questioned by the editor, Richard Stott, and Mr Haines.
Mr Wilson said: 'I found Mr Davies's response to the questions totally unsatisfactory. Throughout the meeting, he said nothing to justify his lying to the editor.'
Mr Davies will present his case today.Reuse content