Prosecutors told the High Court in Belfast the AKM automatic weapon was “fully ready and deployable”.
Details emerged on Wednesday as bail was refused to a man accused of storing the gun at his home in the city.
Martin Burke (59), of Lone Moor Gardens, faces charges of possessing a firearm and ammunition with intent to endanger life and in suspicious circumstances.
He was arrested after police seized the rifle, a magazine and seven bullets from a car stopped in the Letterkenny Road area on May 21.
The court heard surveillance officers allegedly observed co-accused Patrick James Collett, 56, park outside Burke’s home and enter the property earlier that day.
Minutes later Collett, of Rossnagalliagh in Derry, emerged wearing a glove and carrying a plastic bag which he placed in the boot of his Volkswagen Passat before driving off, according to the prosecution.
The AKM assault rifle, magazine and compatible ammunition were found when police searched the vehicle.
“It was well-oiled and maintained, it was fully ready and deployable,” a Crown lawyer disclosed.
“Police have been able to ascertain that weapon has been used previously in relation to dissident republican activity.
“That’s all the information we have at present.”
Amid suggestions the rifle is worth £8,000, she disputed any suggestion that Burke had been exploited by others as an alcoholic “patsy”.
Counsel contended: “Only someone trusted by an organisation would be housing something as valuable as this.”
Burke told police he had agreed to keep the bag containing the gun in his house for about two weeks after being shown CCTV evidence, the court heard.
A defence barrister argued that he had shown he was not a committed dissident republican by co-operating with the investigation.
The court was told that following Burke’s arrest relatives found tins of beer and “a bag of vomit” on the sofa at his home.
“This defendant is an alcoholic, he’s a pathetic enough figure,” said the barrister.
With Burke currently detained in hospital for medical treatment, his son gave evidence that he may be suffering from liver disease.
The judge denied bail citing potential re-offending and interference with the administration of justice.
Mr Justice Huddleston said: “I also have a concern that he’s a vulnerable individual who could also be at risk.”
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