In large bowl, beat butter and granulated sugar with electric mixer on medium speed until light and fluffy. Add lemon peel and egg; beat until well blended. On low speed, gradually beat in flour and salt until well blended.
Heat oven to 350°F. On floured surface, roll dough 1/8 inch thick. Cut with lightly floured 2 1/2- to 3-inch snowflake-shaped cookie cutter. On ungreased cookie sheets, place 2 inches apart.
Bake 8 to 10 minutes or until cookies just begin to brown. Remove from cookie sheets to cooling racks. Cool completely, about 10 minutes.
In small bowl, mix powdered sugar, lemon juice and water. Using small metal spatula, spread glaze on tops of cookies; sprinkle with sparkling sugar. When glaze is dry, store in airtight container.