The England defender is accused of racially abusing Queens Park Rangers defender Anton Ferdinand during a Premier League match in October.
Prosecutor Duncan Penny says the offensive language was uttered “in response to goading by Mr. Ferdinand on the issue of his extra-marital affair.”
Penny says Terry's defense is that he sarcastically repeated the words that Ferdinand wrongly thought he had used.
Terry was stripped of the England captaincy before the 2010 World Cup following allegations he had an affair with a teammate's former girlfriend.
Terry was in Westminster Magistrates' Court on Monday.