Combine sugar and water in a large skillet. Cook over medium heat 15 minutes or until golden (do not stir). Brush crystals from sides of pan with a wet pastry brush, if necessary.
Remove pan from heat; let stand 1 minute. Carefully add butter, stirring until butter melts. Gradually add milk, stirring constantly. (Caramel will harden and stick to spoon.) Cook, stirring constantly, over medium heat 2 minutes or until caramel melts and mixture is smooth and slightly thickened. Remove from heat; stir in vanilla.