Benzalacetone synthase (BAS), a plant-specific type III polyketide synthase (PKS), catalyzes a one-step decarboxylative condensation of malonyl-CoA and 4-coumaroyl-CoA to produce the diketide benzalacetone. We solved the crystal structures of both the wild-type and chalcone-producing I207L/L208F mutant of Rheum palmatum BAS at 1.8 A resolution. In addition, we solved the crystal structure of the wild-type enzyme, in which a monoketide coumarate intermediate is covalently bound to the catalytic cysteine residue, at 1.6 A resolution. This is the first direct evidence that type III PKS utilizes the cysteine as the nucleophile and as the attachment site for the polyketide intermediate. The crystal structures revealed that BAS utilizes an alternative, novel active-site pocket for locking the aromatic moiety of the coumarate, instead of the chalcone synthase's coumaroyl-binding pocket, which is lost in the active-site of the wild-type enzyme and restored in the I207L/L208F mutant. Furthermore, the crystal structures indicated the presence of a putative nucleophilic water molecule which forms hydrogen bond networks with the Cys-His-Asn catalytic triad. This suggested that BAS employs novel catalytic machinery for the thioester bond cleavage of the enzyme-bound diketide intermediate and the final decarboxylation reaction to produce benzalacetone. These findings provided a structural basis for the functional diversity of the type III PKS enzymes.