Mix granulated sugar, cornstarch and nutmeg in 3-quart saucepan. Gradually stir in milk. Heat to boiling over medium heat, stirring constantly. Boil and stir 1 minute; remove from heat. Stir in butter and lemon peel. Spread evenly in ungreased square baking dish, 8x8x2 inches. Refrigerate uncovered at least 3 hours until firm. Cut custard into 2-inch squares, using wet knife. Dip custard squares into eggs, then coat with bread crumbs. Heat oil (1 to 1/2 inches) to 360°F; fry 2 or 3 squares at a time in oil 1 to 2 minutes or until light brown; drain on paper towels. Sprinkle with powdered sugar.