Craig is on trial for allegedly defaming Taxpayers' Union director Jordan Williams, a friend of MacGregor's, who resigned suddenly two days before the 2014 general election.
MacGregor later turned to Williams and alleged Craig had sexually harassed her.
She shared letters and poems the politician sent her and Williams then revealed the details to other Conservative Party members.
When Craig found out he publicly claimed Williams was part of a group of "culprits" determined to have him removed as party leader through a "campaign" of "false accusations".
At a press conference and in a pamphlet sent to more than 1.6 million households across the country, he said Williams was a liar and had "spread false accusations".
Williams then filed defamation proceedings in the High Court, saying he did not lie about Craig.
The trial is now in its second week before Justice Sarah Katz and a jury.
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Today Craig outlined the "lies" he alleges Williams told about him to Conservative Party members.
He said Williams told them he sexually assaulted MacGregor by kissing her, grabbing her breast and forcing her onto a bed on the night of the 2011 general election; that he sent sexual text messages; and that he forced her into debt by refusing to pay her because she refused to sleep with him.
"Each of these allegations is untrue," Craig said today.
Craig said the allegation he sent sex messages to MacGregor, including one where he told her he had slept well because he dreamed of sleeping between her naked legs, was "simply untrue".
"Jordan Williams told a number of influential people [about this text]. I sent no such message, nor did I send any similar messages," he said, submitting hundreds of text message records to the court as proof.
Craig refuted that he pressured MacGregor to sleep with him and withheld her pay when she refused him.
"This is untrue. I never put pressure on Rachel to sleep with me. I never withheld pay from her."
He also addressed an "incident" between him and MacGregor on election night in 2011.
The pair were at a post-election party when it is claimed Craig kissed her and touched her inappropriately.
"An incident did occur where we kissed," Craig said.
"It was a big mistake on my part and I deeply regret it. It certainly was not non-consensual," he said, adding that he "absolutely did not" sexually assault MacGregor.
"That was a highly damaging allegation."
Craig then spoke about the "love letters" he sent MacGregor.
He acknowledged that some people would read more into them than was intended but "they are what they are".
"I accept that I sent Rachel affectionate communication, but the allegation against me made it seem like I was bombarding Rachel," he said.
He said he "never" had any sense his communications were not wanted.
"As far as I was aware this was a two-way street," he told the court.
Craig said Williams and others claimed he had paid a "six-figure sum" to MacGregor to "'settle" her claim of sexual harassment.
"I did not pay anything," he said.
Dirty politics and hidden agendas: The pamphlet that led to the trial
Craig said after the allegations were made he started consider his "options".
"Because of these extreme allegations about me I felt I had been the target of a campaign. I began to think about my options. I really wanted to get the truth out and show the allegations were not true and how the attack on me had been orchestrated.
"I did not think that kind of politics should be acceptable in our country."
He thought about holding a press conference but was not confident the media would get his message across. So, he discussed with his wife Helen publishing a booklet that had a clear message that could not be "spun".
"I wanted the public to know how unfair the campaign had been and to see if there was any chance of changing the public perception of me."
Craig said he did a lot of research including reading and re-reading Nicky Hager's book Dirty Politics and then decided to publish his own.
It was called Dirty Politics and Hidden Agendas and cost him more than $200,000.
He explained the booklet was structured to set out what Williams and the other "schemers" had done to push him out of his leadership, and to address their "false accusations".
At the time Craig felt Williams was part of a smear campaign against him and wanted to expose him.
"I genuinely believed that to be the case and I still do," he said.
"My wife and I carefully considered the booklet, its contents and whether it was the right thing do to. Ultimately we thought it was the only way."
The couple also planned a press conference in conjunction with the release of the booklet, which was sent to more than 1.6 million households across New Zealand.
The trial continues.
