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A key witness in the inquest investigating the disappearance of Sarah McMahon has disputed claims she told police that she had seen the 20-year-old's body in the bedroom of a person of interest in the suspected death.

Known only as Witness A, the woman had allegedly signed a statement late last year claiming she had been called urgently to the home of a friend and was shown the naked body of Miss McMahon in Donald Morey's bedroom.

Miss McMahon was last seen leaving work on November 8, 2000. Two police investigations and a case review had suspected Morey's involvement but could not find evidence to support a prosecution.

The hope is that the inquest will uncover more information.

Morey, who was convicted in 2005 of attempting to kill a sex worker, had befriended Miss McMahon despite being 25 years older and was the last known person to have talked to the Parkerville woman that afternoon.

The inquest had heard that Witness A had given inconsistent accounts of what she knew to police until November 2011 when she signed a statement telling the police that Morey's boss and housemate, Gareth Allen, had called her to the home and shown her the young woman's body in Morey's bedroom.

The inquest heard that Witness A had believed she had a terminal illness at the time she made the police statement.

But today, the witness denied making the claim to police and said she had been "confused", "scared" and not thinking clearly when she signed a statement without reading its contents.

After being played portions of a taped phone call with police from the day before the statement was made, the witness agreed she had been telling an officer about Mr Allen being "panicked" and how Miss McMahon could perhaps have been revived.

She agreed the call also included her suggesting that Mr Allen should have removed Morey from the home a long time go.

She was also heard saying to the officer that Morey had been "cluey" and that even if the young woman's body was found it may not show what happened unless injuries had "gone down to the bone".

Witness A said today that she had a lot of scenarios in her head over the years that had passed since Miss McMahon's disappearance, and she now believed the account she gave on the telephone to be untrue.

However, she also gave evidence of how she had at one point wondered if Morey had been involved and described how he had once shown her "really sick" pornography.

She also backed up other witness accounts of a bag belonging to Morey in which knives, rope, condoms and pornography picturing seemingly deceased women in bondage.

Mr Allen is yet to testify, with the inquest told he denied any involvement in Miss McMahon's disappearance.

Morey also denies any involvement and is yet to give evidence.

The inquest continues.