Peel and cube potatoes. Boil in two cups of water until tender. Drain, reserving 1 cup liquid (add water if needed). Melt butter in large saucepan over medium heat and add onion. Cook, stirring often until tender but not brown. Add flour to saucepan, season with pepper and cook 3 to 4 minutes.

Gradually add potatoes, reserved 1 cup liquid, milk, and sugar. Stir well, then add cheese and ham. Simmer on low heat 30 minutes, stirring often. Serve plain, or in a bread bowl.