Preheat oven to 350°.

In a large saucepan, saute onion in butter until tender.

Stir in flour, salt and pepper until blended. Gradually add milk. Bring to a boil; cook and stir 2 minutes or until sauce is thickened.

Place half of potatoes in a greased 3-qt. baking dish. Pour half of sauce over potatoes. Repeat layers. Bake, uncovered, 60-70 minutes or until potatoes are tender and top is lightly browned. Serve immediately.