Jack Roche is already accused of plotting to blow up Israeli diplomatic missions in Sydney and Canberra.
"We also discussed the possibility to do something in Sydney, during the Olympic Games there," Mr Roche allegedly wrote in notes read in court.
The 2000 plot was first revealed by intelligence officials 18 months ago.
Prosecutors said that Mr Roche, writing in Indonesian, recorded meeting Hambali, the alleged operations chief of the South East Asian Islamic militant group Jemaah Islamiah, in March 2000.
They discussed the Olympic Games plot but it was later overruled by members of Osama Bin Laden's al-Qaeda network when Mr Roche travelled to Afghanistan, according to the notes.
Instead, al-Qaeda operatives decided Israeli and Jewish interests should be targeted to draw attention to the plight of Palestinians, prosecutors said the notes showed.
On Tuesday, prosecutors said Hambali, who is now in US custody at an undisclosed location, paid Mr Roche US80,000ドル to carry out the embassy bombing.
Mr Roche's lawyer has insisted his client is innocent and rejects violence.
He faces a maximum sentence of 45 years in prison if convicted.
Son's testimony
Mr Roche's son, Jens Holland, has quoted his father as saying that he was preparing to make the "greatest sacrifice" in the name of Allah.
"The disbelievers are now out of control, and believe their ways - ways based on inequality, arrogance etc - are right. I hate them for that," Mr Holland read in court from a letter Mr Roche allegedly wrote him during a trip to Afghanistan in 2000.
Mr Roche was arrested in November 2002 during raids by Australian police that targeted suspected sympathisers of the radical Islamic group, Jemaah Islamiah (JI).
The English-born suspect converted to Islam more than a decade ago and has been living in Perth in Western Australia for several years.
The Australian authorities believe he is a member of JI.
The trial, which is due to take a month, continues.
