arcpy.env.overwriteOutput = True appears not to be working?

AOI_test = "AOI_test.shp"
arcpy.env.overwriteOutput = True

for i in loc_list:

    AOI = "AOI_" + i + ".shp"
    arcpy.Select_analysis("locality", AOI, " \"LOCALITY\" = '%s'" % (i))
    arcpy.Merge_management([AOI_test, AOI], AOI_test)

This code isn't working for some reason. Have I understood this code incorrectly, or should I be able to overwrite the merge output FC (AOI_test) repeatedly, now that I have specified that this is acceptable?

Answer

I think the misunderstanding is with how Merge works, which is (with my bolding and italicizing), that it:

Combines multiple input datasets of the same data type into a single, new output dataset.

Let's assume that your loc_list is ["A","B"], then the first time Merge runs in your script the syntax used evaluates to:

arcpy.Merge_management(["AOI_test.shp", "AOI_A.shp"], "AOI_test.shp")

Your output dataset is NOT new, it is the same as one of your two inputs.

---

In response to our discussion as comments I have included the untested code below to illustrate how I am suggesting that you could perform a single Merge. As far as I can see there is no documented limit to the number of feature classes that can be merged together, but it will be interesting to see if 600 is too many. I would first test with 3 feature classes to make sure the code works first then see if any limitation is encountered when you retest with all 600*.

AOI_test = "AOI_test.shp"
arcpy.env.overwriteOutput = True
aoiList = []


for i in loc_list:
    AOI = "AOI_" + i + ".shp"
    aoiList.append(AOI)
    arcpy.Select_analysis("locality", AOI, " \"LOCALITY\" = '%s'" % (i))

arcpy.Merge_management(aoiList, AOI_test)