In a large mixing bowl, combine flour, butter and 1 1/2 c. sugar. Beat egg yolks; add to mixing bowl along with milk and lemon peel. Mix well. Add lemon juice.
In another bowl, beat egg whites until stiff, slowly adding remaining 1/2 c sugar while beating. Fold into batter, Pour into a greased 2 qt casserole. Place in a shallow pan of hot water and bake at 350 for 55-60 minutes or until lightly browned. Serve warm or chilled with powdered sugar dusted on top.