In large bowl, beat butter and sugar with an electric mixer on medium until light and fluffy, about 2 minutes. Add eggs, 1 at a time, beating well after each addition. Beat in vanilla, lemon rind, and 1 teaspoon lemon extract.
On low speed, beat in flour and baking powder until blended. Shape dough into 4 balls. Wrap each ball in plastic wrap and freeze at least 1 hour or refrigerate overnight.
Heat oven to 350°F. On lightly floured surface, divide 1 ball into 9 equal portions, keeping remaining dough refrigerated. With lightly floured hands, roll each piece of dough into a 6-inch rope. Holding rope in middle, double it over and twist strands together. Press ends together to form a point. Place cookies 2 inches apart on an ungreased baking sheet. Bake 12 minutes, or until bottoms are lightly browned. Transfer to wire racks to cool. Repeat with remaining dough.
Combine confectioners' sugar with lemon juice, water, and lemon extract. Working with 2 or 3 cookies at a time, brush with glaze. Sprinkle immediately with alternating rows of blue and white sugar crystals. Allow glaze to set, about 1 hour.