COMBINE sugar and water in medium, heavy-duty saucepan; cook over medium-high heat, stirring occasionally, until mixture comes to a boil. Continue to boil, without stirring, for 10 to 14 minutes, tilting pan occasionally to keep color even until mixture turns a deep caramel color. Remove from heat.
STIR in sweetened condensed milk (mixture will foam up); do not scrape sides of pan. Add 1/4 cup (1/2 stick) butter, one tablespoon at a time, stirring well after each addition. Stir in remaining butter and vanilla extract until smooth. Serve over ice cream or cake, if desired.