Mr Stephens said he believed Mr Smith had been drawn into a "web of manipulation" in his dealings with News Corp.
Lord Justice Leveson said the episode was a calamity for the department and the special adviser.
You have an able, highly regarded young man who isn't in any sense mischievous, who is very keen to do the right thing but has got into a degree of contact, in the context of a small office. How has this happened?
Mr Stephens said:
How it happened I don't know, but the judgment I have made is that, sadly, Mr Smith personally, I believe against his will and intentions, was drawn into almost what seems to me to be a sort of web of manipulation and exaggeration, and was drawn inadvertently beyond what he intended to do or what he wanted to do. But, unfortunately, he was beyond it.
Documents released by the Leveson Inquiry reveal the extent of News Corp lobbyist Fred Michel's contacts with senior figures in Government.
Adam Smith tells the Leveson Inquiry about his resignation after James Murdoch gave his evidence.
So it will be a big week at Leveson next week. Jeremy Hunt will finally get the chance to put his side of the story.