She said Craig was saying, "yeah, well, I'd kiss my sister. I'd do what I say in the letter to my sister".
"I and my lawyer thought it was absurd," MacGregor told the court.
She said Craig also made the comment that "he'd set aside a million dollars and was going to destroy me".
MacGregor, who had received an $18,000 loan from Craig, said the politician threatened to increase the interest of the loan to scare her.
"He was trying to bully me into not going to court, that's exactly what he was doing.
"The interest was going up really, really quickly. It was going up monthly."
MacGregor was also given two $10,000 advances by Craig, while the two attempted to come to an agreement on an hourly rate.
Henry also asked MacGregor about Craig's breach of the confidentiality agreement at a press conference in June 2015.
"I was mortified. He was trying to make me out to be crazy. He was trying to fudge the facts."
The settlement agreement saw the loan and advances written-off, and MacGregor was also paid $16,000.
She said the "mutual resolution", which Craig wanted it called, also implied she would withdraw her complaint of sexual misconduct to the Human Rights Commission.
"There is no way I have ever withdrawn my allegations, to this day my allegations stand concrete strong. What I withdrew was my complaint.
"The way that he wanted to do it looked dodgy, but on the other hand I just wanted to get this man out of my life, I just wanted it over."
She said she had run out of energy to deal with a "very weird man".
"I wanted to just get on with my life and never have anything to do with him again."
She later described Craig as "deluded, weird and wrong".
Craig is suing Slater, the blogger for the Whale Oil Beef Hooked website, for defamation.
In response to the allegations, Craig published a booklet called Dirty Politics, which he distributed to more than a million households and held a press conference about Slater.
Slater is counter-suing Craig for what he said in the pamphlet and press conference.
Yesterday, barrister Madeleine Flannagan gave evidence about how she, with the endorsement of Craig, made contact with Slater several times while acting as the Craigs' family lawyer.
MacGregor resigns before election: 'Colin is a very manipulative man'
Newstalk ZB's political editor Barry Soper was called to the witness stand to give evidence about a phone call he shared with MacGregor before news broke of her resignation as press secretary.
Soper told the court he called MacGregor, whom he had previously worked with in television, on September 18, 2014 - just 48 hours before the general election.
"She was crying," Soper said, adding MacGregor went on to inform him she'd left her position in the Conservative Party.
"Colin is a very manipulative man," Soper said MacGregor told him.
The court was then played three recordings from press interviews with Craig in the aftermath of MacGregor's resignation - where Craig claimed he was unaware why his press secretary had seemingly abruptly resigned.
When questioned by Henry about the newsworthiness of the story, Soper said because it was so close to election day it quickly became "the major story in the last 48 hours of an election campaign".
He said the reasons behind MacGregor's resignation and her comment that Craig was a manipulative man was also newsworthy.
When Craig cross-examined Soper, the political editor said there were rumours swirling about media circles of an affair between Craig and his press secretary.
Craig asked the experienced news editor why he didn't publish the affair rumours.
"We asked you - you denied it," Soper told the court.
"The fact that you were willing to discuss it publicly was of interest."
Craig's claims against Slater
Craig says the allegations written on Slater's blog Whale Oil Beef Hooked were irresponsible, inaccurate and very damaging.
In his opening address, Craig, who is representing himself, set out some of the central claims Slater made against him:
• That he had sexually harassed his former press secretary, Rachel MacGregor.
• He'd given her a "large sum of hush money", which Slater claimed meant the harassment was true.
• Craig had lied because he told his party and the public the accusations weren't true.
• Craig was a "sexual deviant" and had harassed another woman.
• Craig engaged in "devious conduct" regarding the Conservative Party.
