A British soldier was "disgusted" at himself for failing to report the alleged abuse of Iraqi prisoners, a court martial has heard.
Cpl Kenyon, centre, and L/Cpl Cooley, right, deny the charges
Sgt Thomas Simon was at the trial of three soldiers accused of abusing and assaulting Iraqis in Basra, in 2003.
Sgt Simon told the court in Germany he had found two naked male prisoners surrounded by laughing troops.
"I believe now, to my disgust, I should have said something to someone higher up in authority," he said.
Sgt Simon - who was mentioned in dispatches for destroying an enemy anti-aircraft gun - said he had felt revolted and shocked at what he saw and gestured to the prisoners to put their clothes back on.
Cpl Kenyon, 33, and L/Cpl Mark Cooley, 25, both of Newcastle upon Tyne, deny all the charges they face.
L/Cpl Darren Larkin, 30, of Oldham, Greater Manchester, admits one charge of assaulting a prisoner but denies another charge.
The soldiers are all from the Royal Regiment of Fusiliers.
Sgt Simon - a corporal at the time - said he had seen L/Cpl Larkin among the soldiers laughing at the naked prisoners.
He said: "Before I got there I could hear him laughing or what I assumed to be laughing. "As I got closer, the laughing increased."
He said that, in retrospect, he should have told a superior officer about what he had seen.
"But due to the state of my subconscious, I didn't... due to the shock of me actually seeing this, everything else was blocked out."
'Operation Ali Baba'
The abuse allegedly happened following a mission called "Operation Ali Baba" to round up looters from stealing humanitarian aid from Camp Breadbasket.
A commanding officer on Monday told the court martial he told his troops the looters should be "worked hard", to try to stop them returning to the camp.
Sgt Simon said he was not happy about the order.
"In my own mind, I probably believed it was wrong but who was I at the time? I was just doing what I was told," he said.
Evidence of the alleged abuse came to light when a set of photographs was left for processing at a shop in Tamworth, Staffordshire.
A film developer called police because she was "disturbed by the content".
The soldiers are being tried before Judge Advocate Michael Hunter and a panel of British officers in Osnabruck, Germany, where their regiment is based.
The court has been adjourned until Monday.