Terry was charged with a racially aggravated public order offence following the emergence of video footage appearing to show him abusing the Queens Park Rangers defender Ferdinand during a Premier League match last October.
The 31-year-old Chelsea captain allegedly called Ferdinand -- the brother of Terry's England colleague Rio Ferdinand -- a "f****** black c***", Westminster Magistrates' Court in London heard as the trial opened.
He also allegedly told Ferdinand, who is mixed race, to "f*** off" and called him a "f****** knobhead" as the pair exchanged insults.
"When someone brings your colour into it, it takes it to another level and it's very hurtful," Ferdinand, 27, told the court as he gave evidence.
The QPR player said he did not initially believe that any racist terms had been used.
After the match Ferdinand's girlfriend showed him a YouTube clip of the altercation which convinced him that racist language had been used, he told the court.
He added that if he had realised at the time what had been said, he "probably would have let the officials know what happened and dealt with it after the game."
If found guilty, Terry could be fined up to £2,500 (3,150 euros, $3,850), although the damage to the player's lucrative commercial deals would likely be far greater.
Prosecutor Duncan Penny said Terry's words "demonstrated hostility based on Ferdinand's membership or presumed membership of a racial group".
The insult was made "most probably in response to physical gestures being made by Ferdinand which the defendant understood to refer to the well-publicised allegation of an extra-marital affair with a teammate's girlfriend," Penny said.
Allegations emerged in 2010 that Terry, who is married, had an affair with Vanessa Perroncel, the former girlfriend of his England teammate Wayne Bridge, who was also formerly at Chelsea.
Terry maintains that he was only sarcastically repeating words that Ferdinand wrongly thought he had said earlier, the court heard.
A few supporters outside shouted "Good luck, John!" to Terry as he arrived at court, wearing a grey suit and pink tie. He did not speak to reporters.
At an earlier hearing Terry's lawyers had entered a not guilty plea on his behalf.
In a statement made to police last November, Terry said he was offended by the accusation that he had used racist language.
"Whilst footballers are used to industrial language, using racist terms is completely unacceptable whatever (the) situation," he told police.
"I have never been accused of something like that and I did not take his remark lightly at all, and took strong offence to his suggestion."
His trial was delayed until after the Euro 2012 championships after a judge heard that a number of other Chelsea players would be unable to appear as witnesses until the end of the football season.
Terry was stripped of the England captaincy by the English Football Association in February as a result of the racial abuse allegations. Fabio Capello resigned as England coach following that decision.
The case also caused friction when Terry was selected for the Euro 2012 squad last month but Manchester United defender Rio Ferdinand was left out.
The trial is expected to last five days.
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Well someone should focus on Racial Abusing in Pakistan as well. I have seen many people are mocked now a days who dont have a yellow or fair skin tone. In Karachi Lyari Balochs are mocked because of their African Heritage and In Punjab too especially Christian community is mocked because of their skin tone Well some would say that ET did not show discretion while writing this article but in my view it is alright as now many people will come to know that the sentences like these fall into the Racial Abuse category. Just visit youtube and even on Pakistani Videos many Pakistanis use the same language and they will realize that in Civilized world such language is offensive which Terry had used.
Dear ET, some discretion while reproducing the alleged racial slurs would be wise. The language is extremely offensive and objectionable, considering that ET has a very large reader base hailing from a wide variety of backgrounds and values.
I Guess a professional Journalist use careful words to describe such events. Sad reporting ET. Teenagers also read the news these days regarding football.