In a small bowl place mushrooms in enough warm water to cover. Let soak for 30 minutes. Drain. Coarsely chop.
2. For sauce, cook mushrooms and onion in hot oil or margarine until onion is tender. Stir in flour, salt, and pepper. Add milk all at once. Cook and stir until thickened and bubbly. Remove from heat. Stir half of the cheese into the sauce. Place half of the sliced potatoes in a greased 1-quart casserole. Cover with half of the sauce. Repeat layering. Sprinkle with the remaining cheese.
3. Bake, covered, in a 350 F oven for 35 minutes. Uncover; bake 35 minutes more or until potatoes are tender and top is golden brown. Let stand 5 minutes before serving.