The NSW Supreme Court opened proceedings on April 20 after Vasiljkovic sued Nationwide News, the owner of The Australian newspaper, for defamation over an article that described Vasiljkovic's alleged war crimes.
Velibor Bracic, a former Croatian policeman, told the court on Tuesday that while imprisoned at Knin fortress in 1991 he was regularly beaten by Serb guards and that on one occasion he was savagely attacked by Vasiljkovic himself.
Bracic said he was assaulted by Vasiljkovic just after the paramilitary commander had watched two guards attack him.
"If you are beating him, this is how it is done," Captain Dragan allegedly said before kicking Bracic in the face several times, The Australian reported.
Bracic suffered serious injuries and lost 27 kg during his two-month incarceration at Knin fortress.
On one occasion, guards took a bear into the prison and, as a form of punishment, made the prisoners kiss the animal's backside, Bracic told the court in Sydney.
Some of the prisoners begged Captain Dragan to stop the maltreatment because they could not take it anymore. Asked by the judge if the violence subsequently stopped, Bracic said: "On the contrary, the beatings became even worse."
He also said that some prisoners were sexually assaulted, while others had their genitals attached to live electric wiring.
Another witness, English journalist Anne McElvoy, told the court via videolink on Tuesday that she had interviewed Vasiljkovic at Knin fortress in July 1991.
McElvoy said Vasiljkovic told her on that occasion that he was not in Croatia "to kill people, just to neutralise the enemy."
"When the Croatian side uses hospitals or police stations and the villages as fortified positions, I'm sorry, I just have to massacre them," Vasiljkovic was quoted as saying at the time. The interview with him was published in The Times on July 15, 1991.
A US soldier also testified in the case. Colton Perry had served in the French Foreign Legion for several years before volunteering to fight for the Croatian army in the country's 1991-1995 war of independence. He was captured by Serb forces and tortured for three months while a a prisoner of war.
In the courtroom, Perry recognised Vasiljevic as the man who conducted an interrogation during which he was beaten by his men.
Last week several witnesses appeared in the court to testify for Vasiljevic, including the head of the Serbian Orthodox Church in Australia, Bishop Irinej Dobrijevic.
Dobrijevic said Vasiljkovic had returned from Australia to Serbia in 1991 to help the Serbian people. The bishop described him as "an honest humanitarian".
Captain Dragan, who is an Australian citizen and uses the name Daniel Snedden, was arrested in Sydney on January 20, 2006 based on an international arrest warrant issued by Croatia. He has been in a maximum security prison since.
The Australian Federal Court has rejected Vasiljkovic's appeal against the decision to extradite him to Croatia, which wants him on suspicion of involvement in war crimes against Croatian civilians, soldiers and prisoners of war.
Vasiljkovic appealed against the 2007 ruling by the New South Wales District Court that found him fit for extradition, but Judge Dennis Cowdroy dismissed the appeal, saying there were no obstacles to his extradition.
Under Australia's Extradition Act of 1998, Vasiljkovic may file three appeals to different courts.
County prosecutors in the Croatian coastal city of Sibenik have charged Vasiljkovic with violations of the Geneva Conventions in his capacity as commander of a Serb paramilitary unit.