In large bowl, beat butter with electric mixer on medium speed 30 seconds. Gradually add 1 1/4 cups sugar, about 1/4 cup at a time, beating well after each addition and scraping bowl occasionally. Beat 2 minutes longer. Add eggs, one at a time, beating well after each addition. Beat in lemon peel and 1 teaspoon vanilla. On low speed, alternately add flour mixture, about one-third at a time, and milk, about half at a time, beating just until blended.