In large bowl, beat butter and granulated sugar with electric mixer on medium speed until creamy. On low speed, beat in egg, lemon peel and 2 tablespoons lemon juice. Stir in flour, baking soda and salt until well blended.
Divide dough into 4 parts; flatten each part into 1/2-inch-thick round. Wrap each in waxed paper or plastic wrap; refrigerate 30 minutes.
Heat oven to 350°F. Remove 1 round of dough at a time from refrigerator. Between sheets of floured waxed paper or plastic wrap, roll dough until 1/4 to 3/8 inch thick. Cut with 3-inch cookie cutters in various shapes. On ungreased cookie sheets, place cutouts 1 inch apart.
Bake 10 to 12 minutes or just until edges are golden. Cool on cookie sheets about 1 minute before removing to cooling rack. To make cookies for hanging, using a toothpick or end of plastic straw, carefully poke a hole in the top of each cookie while cookies are still hot. Cool 10 to 15 minutes before frosting.
In medium bowl, stir together powdered sugar and meringue powder. Stir in 5 teaspoons lemon juice and enough of the 4 to 5 tablespoons water to make a thin icing. Transfer 1/2 cup of the icing into small bowl; set aside. Using a flexible pastry brush, paint cookies to the edges with icing. Place on cooling rack to dry completely, about 30 minutes.
Beat reserved icing with electric mixer on high speed 5 to 7 minutes or until peaks form. Place in small resealable food-storage plastic bag; cut a very small hole in the bottom of the bag with the plain white icing. Squeeze icing onto glazed cookies. Before icing dries, sprinkle with decorations, and tap off excess. Dry thoroughly on cooling rack. Thread cookies with narrow ribbon for hanging.