Stir the water and sugar in heavy medium saucepan over medium heat until the sugar dissolves. Increase the heat and bring to a boil. Pour into medium bowl. Stir in the lime juice, agave nectar, tequila and lime peel. Refrigerate until cold, about 2 hours.
Transfer the mixture to a container; cover and freeze until firm, about 2 hours. (Can be prepared 2 days ahead and kept frozen.)
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