German Potato Salad with Bacon-Vinegar Dressing

Boil potatoes with water to cover until just tender. Drain and transfer to a bowl and cover with foil. Cook bacon in a skillet until crisp. Drain on paper towels. Pour off all but 2 1/2 tbsp. drippings from skillet. Add onion and cook 2 minutes. Stir together vinegar, water, mustard, sugar, salt and pepper. Add to skiller and simmer until reduced to 2/3 cup. Remove from heat. Add potatoes and toss to coat. Let stand 3 minutes. Sprinkle with bacon and dill and toss gently. Serve salad warm.