In bowl, beat together butter and the ½ C powdered sugar on med-high speed until light and fluffy, about 2 minutes. Add 2 Tsp water and vanilla, beat until combined.
On low speed, beat in the flour just until combined and all ingredients are evenly moistened.
Fold in nuts.
Form into disk, cover with plastic wrap. Refrigerate 2-3 hours.
Heat oven to 350º.
Roll dough into balls, using 1 level Tablespoon for each. Place on ungreased cookie sheets, spacing 1 inch apart.
Bake for 20 minutes or until lightly golden.
Let cookies cool slightly on wire rack. Dust with remaining sugar.