The Crown says investigative journalist Nicky Hager was initially seen as a potential suspect in the receiving of stolen information from blogger Cameron Slater's computer.
It says police wanted to find out if he was in possession of stolen property.
However, after taking legal advice police treated Mr Hager only as a witness.
Mr Hager has asked the High Court in Wellington to rule on the legality of a search warrant and actual search of his home last October.
The warrant was obtained and the search took place after blogger Cameron Slater laid a complaint when information from his computer, obtained by a hacker known as Rawshark, was published in Mr Hager's book Dirty Politics.
Mr Hager's lawyers have told the court the search trampled on media freedom protections and had grave implications for democracy in New Zealand.
However the Crown's lawyer, Brendan Horsley, told the court the police had acted in good faith.
He said the hack of Mr Slater's computer was initially believed to be motivated by revenge or malice and designed to embarrass Mr Slater, as it included about 10 years' worth of personal medical details, and confidential information received from journalists and MPs.
Mr Horsley said the Crown objects to the characterisation of the hack as being in some way altruistic.
He said during media interviews Mr Hager had said he was given the material "out of the blue" on a usb stick and said he was aware the material used in his book had come from an unlawful source.
Mr Horsley said contrary to what Mr Hager's lawyers had claimed, it was reasonable for the police to seek the search warrant because it was clear he was seen as the primary potential source of information about the hacker's identity.
He said Mr Hager's discussions with Rawshark appeared to be extensive, certainly much more so than any other journalist, so it was appropriate the police should seek a warrant to search his property.
Mr Horsley said the warrant application itself was unquestionably honest, and wasn't capable of misleading the judge as claimed by Mr Hager's lawyers.
He said while Mr Hager had said he was advised he should return all materials to his source and he had done that, a detective set out reasons why the police still believed they might find information in his possession.
Mr Horsley said that included the possibility that he had used electronic equipment to complete drafts of his book and in that material there may be the name or some other details about the hacker.
He said the police knew the material had been obtained through hacking and could have embarked on a fruitless exercise to try and identify the hacker through internet service providers (ISPs) and the like.
However they instead chose to seek a search warrant for Mr Hager because they believed the primary evidence relating to the hacker was likely to be in his possession.
The Crown will continue its submissions on Wednesday and Mr Hager's lawyers will then respond to matters raised in them.
Key information omitted - Geiringer
Earlier today, the court was told police failed to mention key information when seeking a search warrant for Mr Hager's home.
Lawyer Felix Geiringer told Justice Clifford that the police did not follow up on a suggestion that there might be an overseas link to the hacking because Mr Slater was out of the country when it happened. He said the judge who signed off the warrant was not told that it had not been done.
He said a suggestion the police might look at New Zealand internet service providers and check the traffic to Mr Slater's computer around that time was also not followed up before the warrant was sought.
Mr Geiringer also outlined other incomplete enquiries and said the police should have given a full explanation of all of them to the judge when they asked for the warrant.
Regarding legal protections, Mr Geiringer said the protection was not against "search and seizure", but against unreasonable search and seizure.
He said in previous cases judges had ruled that a search could be lawful but might still be unreasonable.
Justice Clifford is expected to reserve his decision.