The Czech-bought assault rifle, now linked to 11 other murders and two attempted murders, was first examined at the Weapons and Explosives Research Centre (Werc) - a previously unheard of unit located within the Northern Ireland Forensic Science Laboratory, the court was told.
Judge Mr Justice Weir, who is hearing the long-awaited inquest, said: "This is the first time it has ever come to my attention that there was a forensic system within a forensic system."
Ms Mallon, 76, was gunned down as she watched television at a house near Dungannon, Co Tyrone on 8 May, 1994.
The spinster, who had been staying with relatives because she felt vulnerable, was unable to escape when two loyalist gunmen indiscriminately opened fire on the bungalow at Cullenramer Road.
The Ulster Volunteer Force (UVF) said its mid-Ulster brigade had been responsible and were targeting two of her nephews Christopher Mallon, who was not home at the time, and Martin Mallon, who lived half a mile away.
In the wake of the shooting, Army spying equipment was found in a nearby field sparking claims of security force collusion.
Last week, it emerged that the Historical Enquiries Team - a specialist unit set up to re-examine Troubles-related cold cases - had linked the murder weapon to the UVF killings of Charles and Theresa Fox at The Moy in 1992, as well as the murders of John Quinn, Dwayne O'Donnell, Malcolm Nugent and Tommy Armstrong outside a bar in Cappagh, Co Tyrone in 1991.
But, Barry MacDonald QC, who is representing the Mallon family, said the rifle was now known to have been involved in at least eight incidents that resulted in 11 murders and two attempted killings.
He also claimed inaccurate information - that the gun had no previous history - was fed into the system by Special Branch.
Mr MacDonald said: "The practice seems to have been when cartridge cases were collected, they were forwarded to the Forensic Science Laboratory of Northern Ireland - but it was the Werc who conducted their investigations and provided a steer.
"The upshot is that these incorrect conclusions have been made by a section of Special Branch in circumstances where the object of this entire exercise - that's this inquest -- is to allay suspicion and rumour about the involvement of Special Branch."
Judge Weir told the court he had never heard of Werc despite a lengthy career as a defence barrister and judge.
He also expressed concern that they were not ballistics experts and said he would be demanding a full explanation on how they operated and who took the decision to conceal their existence.
"If their work is to be of any value, they are to be people of skill. You cannot learn on the job to be a ballistics examiner. This is not a milk round these people are doing," the judge said.
Martin Mallon said the family had been left bemused by the latest revelations.
He said: "We have had Special Branch hiding behind screens, we have heard evidence about burning notebooks and items being destroyed. We have consistently heard about Special Branch being a force within a force and now it appears that Werc was a unit within a unit.
"Roseanne was a 76-year-old pensioner who was murdered in her home. People have attempted to mislead facts, cover-up the truth. We simply want the truth and accountability."
Notorious killer Billy Wright and two other loyalists were arrested and questioned about Ms Mallon's murder but no-one has ever been convicted.
Sinn Fein MLA Sean Lynch, who sits on the Stormont justice committee and is a friend of the Mallon family, said: "It is obvious that the British state is covering up, delaying and prevaricating on vital evidence - particularly around ballistics."
Relatives of the Foxs and those killed at Cappagh joined the Mallon family in the public gallery, supported by the victims' group Relatives for Justice.
Solicitor Niall Murphy, who represents the Fox family and next of kin of two Cappagh victims, said: "We are very concerned at the slow-drip nature of this discovery.
"It is very distressful for these family members to hear this information in this way and our clients fear that there is a wider conspiracy and that the State are involved in a cover-up."
The inquest has been adjourned until next May to allow the HET to complete its investigation into 24 murders in the east Tyrone area between 1988 and 1994 - including Ms Mallon's death.