Cook bacon until crisp. With slotted spoon, remove bacon. Add onion to drippings in skillet. Sauté until tender, about 10 minutes. Blend in sugar, flour, pepper, and 1 1/2 tsp. salt. Gradually add water and vinegar. Heat to boiling. Reduce heat to low, cover and simmer 10 minutes. Add potatoes and bacon pieces. Gently toss to coat with dressing; heat through.
Makes 4 servings, about 315 calories each.