beta-Ketoacyl-acyl carrier protein synthase-III (KAS-III) and its homologues are thiolase-fold proteins that typically behave as homodimers functioning in diverse thioester-based reactions for C-C, C-O, or C-N bond formation. Here, we report an exception observed in the biosynthesis of lipstatin. During the establishment of the C-22 aliphatic skeleton of this beta-lactone lipase inhibitor, LstA and LstB, which both are KAS-III homologues but phylogenetically distinct from each other, function together by forming an unusual heterodimer to catalyze a non-decarboxylating Claisen condensation of C-8 and C-14 fatty acyl-CoA substrates. The resulting C-22 alpha-alkyl beta-ketoacid, which is unstable and tends to be spontaneously decarboxylated to a shunt C-21 hydrocarbon product, is transformed by the stereoselective beta-ketoreductase LstD into a relatively stable C-22 alpha-alkyl beta-hydroxyacid for further transformation. LstAB activity tolerates changes in the stereochemistry, saturation degree, and thioester form of both long-chain fatty acyl-CoA substrates. This flexibility, along with the characterization of catalytic residues, benefits our investigations into the individual roles of the two KAS-III homologues in the heterodimer-catalyzed reactions. The large subunit LstA contains a characteristic Cys-His-Asn triad and likely reacts with C-8 acyl-CoA to form an acyl-Cys enzyme intermediate. In contrast, the small subunit LstB lacks this triad but possesses a catalytic Glu residue, which can act on the C-8 acyl-Cys enzyme intermediate in a substrate-dependent manner, either as a base for C alpha deprotonation or as a nucleophile for a Michael-type addition-initiated cascade reaction, to produce an enolate anion for head-to-head assembly with C-14 acyl-CoA through a unidirectional nucleophilic substitution. Uncovering LstAB catalysis draws attention to thiolase-fold proteins that are noncanonical in both active form and catalytic reaction/mechanism. LstAB homologues are widespread in bacteria and remain to be functionally assigned, generating great interest in their corresponding products and associated biological functions.