Place the potatoes in a saucepan; cover with water. Bring to a boil. Reduce heat; cover and cook for 25-30 minutes or until tender. Drain and rinse in cold water. Cut potatoes into 1/4-in. slices; set aside.
In a large skillet, cook bacon over medium heat until crisp; using a slotted spoon, remove to paper towels. Drain, reserving 2 teaspoons drippings.
In the drippings, saute the onion until tender. Stir in the flour, salt, celery seed and pepper until blended. Gradually add water, vinegar and sugar. Bring to a boil; cook and stir for 2 minutes or until thickened. Reduce heat to low. Add the potatoes and bacon; stir gently. Serve warm.