Prepare the shortbread crust: Cream butter and sugar in medium bowl with electric mixer set on high speed. Add vanilla and mix until combined. Add flour and mix at low speed until fully incorporated.
Press dough evenly into bottom of an 8- by 8-inch baking pan. Refrigerate until firm, approximately 30 minutes.
Prick shortbread crust with fork and bake for 30 minutes or until crust turns golden brown. Cool on rack to room temperature.
Prepare the cream cheese filling while the crust is baking: Beat the cream cheese and sugar until smooth in medium bowl with electric mixer set on high speed. Add egg and lemon extract and beat on medium speed until light and smooth. Cover bowl tightly and refrigerate.
Prepare the lemon curd: Blend the egg yolks with cornstarch and sugar in medium non-aluminum saucepan. Place over low heat and slowly whisk in water and lemon juice. Increase heat to medium-low and cook, stirring constantly, until mixture thickens enough to coat the back of a spoon. Remove from heat. Add lemon peel and butter and cool for 10 minutes.
Assemble the bars: Sread chilled cream cheese filling evenly over cooled shortbread crust with spatula. Spread lemon curd evenly over cream cheese filling. Place pan in center of oven. Bake 30 to 40 minutes or until edges begin to turn light golden brown. Cool to room temperature on rack. Chill in refrigerator 1 hour before cutting into bars. Dust top with confectioners' sugar.