Antonio Curatolo, 52, said that a couple he had seen "chatting animatedly" on a basketball court were her alleged murderers, American student Knox and Italian Sollecito.
He told the court that he saw them "around five times" between 9.30pm and midnight on the night Miss Kercher died.
Knox and Sollecito have always claimed they were at home when Miss Kercher was killed in November 2007 and did not leave until the following morning.
When asked if he recognised the two people he had seen in court Mr Curatolo said he could. He pointed out Knox and Sollecito who were sitting just a few yards away from him.
According to a post-mortem report police and prosecutors believe that Miss Kercher was murdered between 9pm and 11pm on 1st November 2007. She was found semi-naked and with her throat cut in the bedroom of the house she shared with Knox in Perugia, Italy.
The trial has already been told by prosecutor Giuliano Mignini that she was murdered after refusing to take part ina drug-fuelled sex game. Knox, dressed in a lilac jumper and blue jeans, exchanged glances with Sollecito in court and during breaks smiled and joked with warders guarding her.
On Friday the court heard from a woman who said she had heard a "prolonged" scream coming from the house the night Miss Kercher was killed and imitated it for the court.
Nara Capezzali said the scream made her "skin crawl" and the memory of it still troubled her now.
Knox's mother Edda Mellas has arrived to give her support but will not be allowed to attend court because she is listed as a witness.
The court also heard from unemployed Fabrizio Gioffredi who said he had seen Knox, Sollecito and Guede together with Miss Kercher two days before she was killed.
Prosecutor Mignini has told the trial that Miss Kercher was a victim of a sex game organised by the three and that Knox, Sollecito and Guede all knew each other.
This is denied by the couple. After giving his evidence Sollecito stood up and made a spontaneous declaration as he is allowed to under Italian law challenging Mr Gioffredi.
He said:''This witness could not have seen me with Rudy Guede because as I have already said, I do not know Rudy Guede and I have never met him before in my life.
"Also the day he claims to have seen us altogether is impossible as I was somewhere else and that will be proved as the trial continues.''
Outside court Knox's mother Edda Mellas said: "'I am not allowed inside because at some stage I will have to testify but I saw Amanda briefly.
"She is doing well and looking forward to coming home and being with her family and friends.
"I have brought her some flip flops, CDs and books to read - I gave her a book in German by Herman Hesse and another on a shipwreck.
"We were allowed to hug and we both cried. She is innocent of all this and the trial will show that.''
Francesco Maresca, the Kerchers' lawyer, said that he expected the case to be finished by the autumn. He said that Miss Kercher's parents and siblings would give evidence, probably in May.
Last October a third defendant, 21-year-old Ivory Coast national Rudy Guede, was found guilty and sentenced to 30 years for sexually assaulting and murdering Miss Kercher.
Miss Kercher, a Leeds University student who was from Coulsdon, Surrey, was in Italy as part of a year-long exchange programme with her European Studies degree. She had only been in Perugia for two months when she was killed.
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