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She was watching the fine snow falling onto the surface of the lake.
Literal
She [topic-は] fine [attributive-な] snow [subject-が] lake-surface [onto-に] fall [object-nominalizer-のを] was-gazing-at.
The のを construction nominalizes the embedded clause 細かな雪が湖面に降る ('fine snow falls on the lake surface') into a 'thing' that can be the object of perception — 眺める ('gaze at') takes it with を. This [clause]+のを+perception verb frame is how Japanese stacks 'watching X happen' patterns: 雨が降るのを見る ('watch the rain fall'), 子供が遊ぶのを聞く ('hear the children playing'). 細かな is an alternative attributive form of 細かい ('fine, small, detailed') — the な ending creates a slightly softer, more refined feel. 湖面 (lake-surface) is a literary compound that paints the scene more carefully than just 湖 ('lake').