Beat 1/4 cup butter at medium speed with an electric mixer until creamy; gradually add 1/3 cup sugar, beating until light and fluffy. Add egg, beating until blended.
Combine 2 1/3 cups flour, baking powder, and salt. Add flour mixture to butter mixture alternately with milk, stirring well after each addition. Stir in vanilla extract, and fold in chopped peaches.
Spoon muffin batter into greased or paper-lined muffin pan, filling two-thirds full.
Combine 1/4 cup sugar, 3 tablespoons flour, and cinnamon; cut in 2 1/2 tablespoons butter with pastry blender or fork until mixture resembles crumbs. Sprinkle evenly over muffin batter.
Bake at 375° for 20 minutes or until golden. Remove from pans, and cool on wire racks.