The 31-year-old told the Football Association a week after being accused of racially abusing QPR defender Anton Ferdinand that racism was not in his character.
Terry is accused of calling Ferdinand a "f****** black c***" during a Chelsea match against QPR on October 23 last year.
A recording of the interview was played on Tuesday at Westminster Magistrates' Court.
He said: "I have been called a lot of things in my football career and off the pitch, but being called a racist I am not prepared to take.
"That's why I came out and made my statement immediately.
"I am not having Anton thinking that about me or anyone else. That's not my character at all."
Terry denies a racially aggravated public order offence.
The centre-half told the FA investigator Jennifer Kennedy that he was repeating back to Ferdinand what he believed he had said to him.
Terry said he thought Ferdinand was accusing him of calling him a black c***.
Terry said: "I was taken aback by that. I have never been accused of that."
Terry went on to say in the interview that he was angry at thinking Ferdinand was accusing him.
"I felt strongly about it and wanted to clear it up before I left the stadium or he got the chance to leave the stadium."
Terry told the investigator that Ferdinand was shouting abuse at him over allegedly having an affair with Chelsea team-mate Wayne Bridge's girlfriend.
Terry said he was aware how the CCTV looked to people who did not understand the context.
Saying that Ferdinand shouted "black c***" at him, the defendant said his counterpart obviously was not calling him that, so he repeated it, then called him a "f***** knobhead".
Terry said he could not think of anything he said that would make the QPR player believe he had racially abused him.
"I know I have nothing to hide," he said.
He added that, with all the cameras and thousands of fans present, a player would not shout racist abuse across the pitch at someone.
He said of the accusation: "I was hurt by it, taken aback and really surprised."
He added: "It's something I took and didn't like it at all.
"I have never been accused of that before, inside or outside football.
"I took it to heart. If I had something to hide I wouldn't be projecting it in front of the Sky cameras and the people in the ground.
"I could have easily had my hand over my mouth or whispered in his ear."
The Chelsea captain acknowledged the footage "did not look good" but repeated that he had nothing to hide.
His representative, Keith Cousins, told the hearing that Terry was "rhetorically responding" to what he thought Ferdinand had accused him of.
"The important factor is what you thought you were being accused of," he said.
The Liverpool 2013/14 soccer jersey is available for pre-order. The Reds are eager to compete for silver next season.
One of the top soccer cleats for control the Nike CTR360 will not let you down on the field in tight spaces.
Chelsea won the Europa League on Wednesday. The Blues defeated Benfica 2-1 on injury time goal from Ivanovic.
The Juventus jersey for the 2013/14 was released earlier this week. Be the first to wear the colors of the Old Lady.
The adidas Nitrocharge is the most talked about new cleat in years. It was released on May 15 and will take your pitch by storm.
The new PUMA evoSPEED 1.2 FG. A great new soccer cleat with classic look and first time for PUMA to be on the cleat.
Ajax has released their away soccer jersey for the 2013/14 season. Get in the Gear.
adidas has added some color to the Predator line with this new colorway. Released on May 17. Be the first to own a pair.
The push for more color on their cleats, adidas has added the infrared colorway to the adiZero f50 Line.
Borussia Dortmund hears Wembley Calling and are headed to London for the Champions League final.