COOK and stir onion in butter in large saucepan on medium-high heat until tender. Add potatoes, water, celery and pepper. Bring to boil. Reduce heat to medium-low; cover. Simmer 15 minutes or until vegetables are tender.
STIR small amount of the milk into flour until well blended. Gradually add flour mixture to hot vegetable mixture, stirring constantly. Stir in remaining milk and the Smokies; cook until mixture boils and thickens, stirring constantly.
ADD VELVEETA; cook until completely melted, stirring frequently.