The singer, 74, told the BBC’s The Graham Norton Show her rendition of the song was done “so beautifully”.
Parton released the original song in 1974 before it was covered by Houston in 1992.
Parton said she “forgot” she had been asked about the prospect of Houston covering the song “until I was driving home and I heard this voice come on the radio”.
She added: “It kind of rang a bell, but it didn’t hit because she was kind of talking it, and all of a sudden it went into the ‘I will always love you’ bit and I had to pull over to listen to it.
“It was one of the most overwhelming feelings I have ever had to hear it done so well, so beautifully and so big.
“She took it and made it so much more than what it would ever have been.
“It was such a joy as a songwriter. I don’t think I will have a bigger thrill, ever.”
Parton also said that when she was going through her old demo cassettes a few years ago she found that I Will Always Love You and Jolene were back to back on one of the tapes.
“So, I had to have written them, if not the same day, then within a couple of days,” she said.
“If I did them at the same time, it must have been a really good writing night for me. I was really surprised by that.”
Parton also discussed her new book Dolly Parton, Songteller: My Life In Lyrics, saying it is something she is “really proud” of.
“There’s some heavy subject and lyrics in there,” she said.
Parton added: “I haven’t included all my songs, but chose ones I thought would be interesting to tell the stories of behind the scenes.”
The Graham Norton Show airs on Friday at 10.45pm.
