A method of manufacture of an integrated circuit packaging system includes: providing a package substrate, having a component side and a system side; mounting a first integrated circuit die on the component side of the package substrate; mounting a second integrated circuit die on the component side of the package substrate; mounting an internal package, having an internal die, over the first integrated circuit die; coupling chip interconnects between the first integrated circuit die, the second integrated circuit die, the internal die, the component side, or a combination thereof, and forming a stacked package body by encapsulating the component side, the first integrated circuit die, the second integrated circuit die, the internal package, and the chip interconnects.