WikiLeaks' source Bradley Manning was allowed to handle secret intelligence even though he was plagued by "mental instability" and volatile behavior, his supervisor said Tuesday.

Manning was convicted of espionage last month for passing a trove of secret documents to the anti-secrecy website WikiLeaks.

This week, his defense lawyer is arguing at sentencing hearings before a military judge that Manning should receive less than the maximum punishment for his offenses.

The 25-year-old soldier is expected to read a statement as early as Wednesday and possibly take the stand to testify.

According to the defense, Manning's "erratic" displays should have disqualified him from serving in Iraq or retaining access to classified reports.

Retired Sergeant First Class Paul Adkins, who oversaw Manning when he served as a junior intelligence analyst in Iraq, acknowledged once finding the soldier curled up on the floor with a knife at his feet, with the words "I WANT" carved into a chair.

"He was sitting on the floor in the fetal position," Adkins told the court.

After speaking to Manning, the sergeant chose to send the soldier back to work in his brigade's intelligence section, where Manning allegedly punched a female soldier hours later.

Adkins also confirmed writing memos to a military therapist describing Manning's "mental instability" as a "growing concern," marked by angry eruptions.

But the sergeant said he chose not to file an official "derogatory information" report on the incidents as he felt the young private was needed to assess reports on Shia militants amid a manpower shortage in the intelligence unit.

"I wanted to make sure we had enough soldiers to conduct our mission," he said.

Adkins also did not inform his commanders or mental health counselors about an email that Manning sent to him, recounting his angst over his sexual identity.

With the subject line "My Problem," Manning describes his emotional turmoil over his gender, illustrated by an accompanying photograph of himself dressed as a woman with a wig and lipstick.

"This is my problem. I've had signs of it for a very long time. It's caused problems within my family. I thought a career in the military would get rid of it," the mail read.

"It's not something I seek out for attention. And I'm trying very, very hard to get rid of it by placing myself in situations where it would be impossible. But it's not going away."

But Adkins said he chose not to alert his superiors.

"I really didn't think at the time that having a picture floating around with one of my soldiers in drag was in the best interest of the intel mission," he said.

At the time, openly gay soldiers were banned from serving in the military. If seen by commanding officers, Manning's email and photo would have almost certainly resulted in his discharge from the force.

Adkins said he believed the Army was not a good fit for Manning in the long-run but that the soldier would have been able to get through the deployment with the help of counseling.

Adkins was later disciplined over his handling of Manning and demoted.

Three years ago, Manning was working as an intelligence analyst near Baghdad when he was arrested ago over the document dump to WikiLeaks.

Before his trial began, Manning admitted handing 700,000 classified documents -- including battlefield logs and diplomatic cables -- to the anti-secrecy website founded by Julian Assange.

Manning was cleared of the most serious charge against him, that he had knowingly helped America's enemies. But he could still face a sentence of up to 90 years for his offenses that include espionage and computer fraud.

Manning has said he passed the documents to WikiLeaks to spark a public debate and reveal the true face of America's wars.