Place chicken in a large flat dish. Pour buttermilk over; cover and refrigerate for 1 hour. Combine flour, salt and pepper in a double-strength paper bag. Drain chicken pieces; toss, one at a time, in flour mixture. Shake off excess; place on waxed paper for 15 minutes to dry. Heat 1/8 1/4 inch of oil in a large skillet; fry chicken until browned on all sides. Cover and simmer, turning occasionally, for 40-45 minutes, or until juices run clear and chicken is tender.
Uncover and cook 5 minutes longer. Remove chicken and keep warm. Drain all but 1/4 cup drippings in skillet; stir in flour until bubbly. Add milk and 1 1/2 cups water; cook and stir until thickened and bubbly. Cook 1 minute more. Add remaining water if needed. Season with salt and pepper. Serve with chicken.