Christine Thomas, 57, was killed in Aberporth, Ceredigion, in July 2008.
Swansea Crown Court heard Brian Thomas, 59, of Neath, accepts he killed her but says he has a sleep disorder which had been triggered by "boy racer activity".
Jurors have been told they can reach a verdict of not guilty or of not guilty by reason of insanity.
Prosecuting barrister Paul Thomas QC, in his opening words to the jury on Tuesday morning, described the case as "highly unusual".
He described how Mr Thomas killed his wife, his childhood sweetheart, because he had dreamt she was a man who had broken into their motor home.
The court was told Mr Thomas's disorder meant he was not in control of his actions when he strangled his partner of 40 years.
After commissioning evidence from sleep experts, the prosecution agreed his actions were involuntary and he could not be held responsible.
Prosecuting, Mr Thomas said the defendant was charged with the murder of his wife, whose death he accepted causing.
Act strangely
But the barrister said the prosecution did not seek a murder or manslaughter conviction.
Instead, he said the prosecution would be arguing for the "special verdict of not guilty by reason of insanity".
The alternative, the jury was told, would be "a simple verdict of not guilty".
The jury was told that the couple, who have two grown-up daughters, enjoyed holidaying together in their camper van.
The daughters said their father had been prone to episodes of sleepwalking, during which he had been known sometimes to act strangely.
The court heard how Mr and Mrs Thomas had gone on holiday in their camper van in July 2008 and stayed the night at a vehicle park in Aberporth.
A group of younger people turned up at the car park after they had gone to bed, and the screeching of brakes and tyres - described in court as "boy racer activity" - disturbed the couple, who moved from the site's lower to its higher car park.
'Highly sceptical'
The prosecution said that at 0349 the next morning, Mr Thomas made a 999 call, which was later played to the court, in which he said he had killed his wife because he had mistaken her for an intruder in a dream.
He said he had dreamt he was fighting one of the boy racers.
The prosecution said the defendant had told the 999 operator: "I woke up fighting one of those boys but it wasn't a boy, it was Christine."
In police interviews, Mr Thomas repeated what he had told the 999 operator - that he had dreamt of a man crawling across the bed, putting him in a headlock, then waking to find his wife dead.
The prosecution told the jury that the police and CPS had been "highly sceptical" of his explanation and charged him with murder.
But because the defendant had raised the matter of his sleep disorder, both defence and prosecution commissioned experts to investigate it.
Tests were carried out on Mr Thomas as he slept and both sleep experts agreed he had killed his wife while affected by a sleep disorder, meaning his behaviour was "involuntary."
Spoke through tears
The barrister told the court Mr Thomas's behaviour was consistent with automatism, which meant at the time he killed his wife, his mind had no control over what his body was doing.
The jury was told that neither sleep expert would go into details about the condition because they did not want details of it made public in case of "copycat killings".
Later, the court was played a 10-minute excerpt of the call Mr Thomas had made to emergency services.
As it was played, the defendant broke down in tears, sobbing loudly and burying his face in his hands.
In the recording, Mr Thomas spoke through tears in a panicked-sounding voice: "I think I killed my wife. I killed her. Oh my God."
He explained he thought he had been fighting but then told the operator: "There was no boys, it was me. I must have been dreaming or something."
Later he was heard saying: "I love her. What have I done? She's my world."
The court also heard the couple had been sleeping together in the camper van in a change to their sleeping arrangements at home where they slept separately.
Mr Thomas said it was the prosecution's case that the defendant had suffered insane automatism caused by an internal condition.
He said the defence would argue it was non-insane automatism caused by external factors, particularly the stress caused by the boy racers.
The case was adjourned until Wednesday.
