In a medium bowl stir together flour, the 1/3 cup sugar, and 2 teaspoons lemon peel. Cut in the 1/2 cup butter until mixture resembles coarse crumbs. In a small bowl combine the 1 egg yolk and the 2 tablespoons cold water. Gradually stir egg yolk mixture into flour mixture. Gently knead to form a ball. If necessary, cover and chill for 30 to 60 minutes or until dough is easy to handle.
Preheat oven to 375 degrees F. For filling, in a medium saucepan stir together the 2/3 cup sugar and the cornstarch. Stir in 2 teaspoons lemon peel, the lemon juice, the 1/4 cup water, and the 2 tablespoons butter. Cook and stir over medium heat until thickened and bubbly.
Gradually stir about half of the hot lemon mixture into the 3 egg yolks. Return egg yolk mixture to saucepan. Bring to a gentle boil over medium heat; reduce heat. Cook and stir for 2 minutes. Transfer to a small bowl. Cover surface with plastic wrap and chill until needed.
Divide dough into 36 pieces. Press evenly onto bottoms and up sides of thirty-six 1-3/4-inch muffin cups. Bake about 10 minutes or until pastry is golden. Cool in muffin cups on wire racks for 10 minutes. Remove from cups.
Spoon 1 rounded teaspoon of filling into each tassie. Cover and chill for 1 to 2 hours before serving. If desired, garnish with lemon peel strips.