The typical reaction catalyzed by type III polyketide synthases (PKSs) is a decarboxylative condensation between acyl-CoA (starter substrate) and malonyl-CoA (extender substrate). In contrast, curcumin synthase 1 (CURS1), which catalyzes curcumin synthesis by condensing feruloyl-CoA with a diketide-CoA, uses a β-keto acid (which is derived from diketide-CoA) as an extender substrate. Here, we determined the crystal structure of CURS1 at 2.32 Å resolution. The overall structure of CURS1 was very similar to the reported structures of type III PKSs and exhibited the αβαβα fold. However, CURS1 had a unique hydrophobic cavity in the CoA-binding tunnel. Replacement of Gly-211 with Phe greatly reduced the enzyme activity. The crystal structure of the G211F mutant (at 2.5 Å resolution) revealed that the side chain of Phe-211 occupied the hydrophobic cavity. Biochemical studies demonstrated that CURS1 catalyzes the decarboxylative condensation of a β-keto acid using a mechanism identical to that for normal decarboxylative condensation of malonyl-CoA by typical type III PKSs. Furthermore, the extender substrate specificity of CURS1 suggested that hydrophobic interaction between CURS1 and a β-keto acid may be important for CURS1 to use an extender substrate lacking the CoA moiety. From these results and a modeling study on substrate binding, we concluded that the hydrophobic cavity is responsible for the hydrophobic interaction between CURS1 and a β-keto acid, and this hydrophobic interaction enables the β-keto acid moiety to access the catalytic center of CURS1 efficiently.