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Abstract Background Polyketide synthases (PKSs) are classified into three types based on their enzyme structures. Among them, type III PKSs, catalyzing the iterative condensation of malonyl-coenzyme A (CoA) with a CoA-linked starter molecule, are important synthases of valuable natural products. However, low efficiency and byproducts formation often limit their applications in recombinant overproduction. Results Herein, a rapid growth selection system is designed based on the accumulation and derepression of toxic acyl-CoA starter molecule intermediate products, which could be potentially applicable to most type III polyketides biosynthesis. This approach is validated by engineering both chalcone synthases (CHS) and host cell genome, to improve naringenin productions in Escherichia coli. From directed evolution of key enzyme CHS, beneficial mutant with ~ threefold improvement in capability of naringenin biosynthesis was selected and characterized. From directed genome evolution, effect of thioesterases on CHS catalysis is first discovered, expanding our understanding of byproduct formation mechanism in type III PKSs. Taken together, a whole-cell catalyst producing 1082 mg L−1 naringenin in flask with E value (evaluating product specificity) improved from 50.1% to 96.7% is obtained. Conclusions The growth selection system has greatly contributed to both enhanced activity and discovery of byproduct formation mechanism in CHS. This research provides new insights in the catalytic mechanisms of CHS and sheds light on engineering highly efficient heterologous bio-factories to produce naringenin, and potentially more high-value type III polyketides, with minimized byproducts formation.