In large bowl, combine 1 cup sugar and margarine; beat until light and fluffy. Add milk, lemon peel, vanilla and egg; blend well. Add flour, baking powder, baking soda, salt and nutmeg; mix well. Cover with plastic wrap; refrigerate 30 minutes for easier handling.
Heat oven to 375°F. In small bowl, combine 2 tablespoons sugar and cinnamon. Shape dough into 1-inch balls; roll in sugar-cinnamon mixture. Place 2 inches apart on ungreased cookie sheets.
Bake at 375°F. for 7 to 10 minutes or until light golden brown. Cool 1 minute; remove from cookie sheets.