Preheat oven to 350 degrees F. Melt butter in medium saucepan on medium heat. Blend in flour, salt, mustard and pepper. Gradually add milk, stirring until well blended; cook until thickened, stirring constantly.
Add 1-1/2 cups of the cheese and the onion; cook until cheese is melted, stirring frequently. Layer potatoes and cheese sauce alternately in 2-quart casserole dish, ending with a layer of the cheese sauce.
Bake 1 hour 15 minutes or until potatoes are tender. Sprinkle with the remaining cheese. Bake an additional 5 minutes or until cheese is melted.