Combine first 3 ingredients in a plastic or paper bag; shake to mix. Place 2 or 3 pieces of chicken in bag; shake well. Repeat procedure with remaining chicken. Reserve 2 tablespoons seasoned flour for gravy.
Heat 1/2 inch of oil in a large skillet to 325°; add chicken. Cover, and cook 7 minutes. Turn chicken; cover, and cook an additional 7 minutes. Reduce heat; drain off oil, reserving 2 tablespoons oil and chicken in skillet. Add water to skillet; cover and continue cooking over low heat 20 minutes or until tender. Drain chicken on paper towels; transfer to a warmed serving platter
Add butter to pan drippings, and melt. Scrape sides of skillet with a wooden spoon to loosen browned crumbs. Gradually add reserved flour mixture, stirring until smooth. Cook 1 minute, stirring constantly. Gradually add milk; cook over medium heat, stirring constantly, until thickened and bubbly. Serve gravy with chicken.