The central defender set Posh on the way to maximum points in the top-of-the-table showdown with a stunning strike on the stroke of half-time. Lee collected a loose ball and swept past three defenders before guiding his 44th-minute shot into the far corner.
Posh made sure of the success in front of a sell-out 14,000-plus crowd with a second goal 11 minutes from time as they cut Leicester's lead at the summit to four points.
Top-scorer Craig Mackail-Smith, who had earlier missed two golden chances, cleverly released Chris Whelpdale and the wide man made no mistake with a fine finish from 15 yards.
Only the exploits of on-loan keeper Tony Warner spared the visitors a heavier defeat. He parried an Aaron Mclean diving header before tipping a goal-bound free-kick from Dean Keates onto the bar while Leicester didn't force Posh stopper Joe Lewis into a single save.
Posh boss Darren Ferguson was sent to the stands by referee Chris Foy during the second half.