Place the potatoes in a Dutch oven and cover with water. Bring to a boil. Reduce heat; cover and simmer for 15-20 minutes or until tender.
Meanwhile, in a large skillet, cook bacon over medium heat until crisp. Using a slotted spoon, remove to paper towels. In the drippings, saute the onion, celery and green pepper until tender. Stir in the flour, sugar, salt and pepper until blended. Combine water and vinegar; stir into vegetable mixture. Bring to a boil; cook and stir for 2 minutes or until thickened.
Drain potatoes and place in a large serving bowl. Pour dressing over potatoes. Add bacon and toss to coat. Serve warm or at room temperature. Refrigerate leftovers.