In this study the repressor of Escherichia coli lac operon, LacI, has been engineered for altered effector specificity. A LacI saturation mutagenesis library was subjected to Fluorescence Activated Cell Sorting (FACS) dual screening. Mutant LacI-L5 was selected and it is specifically induced by lactulose but not by other disaccharides tested (lactose, epilactose, maltose, sucrose, cellobiose and melibiose). LacI-L5 has been successfully used to construct a whole-cell lactulose biosensor which was then applied in directed evolution of cellobiose 2-epimerase (C2E) for elevated lactulose production. The mutant C2E enzyme with ~32-fold enhanced expression level was selected, demonstrating the high efficiency of the lactulose biosensor. LacI-L5 can also be used as a novel regulatory tool. This work explores the potential of engineering LacI for customized molecular biosensors which can be applied in practice.