Preheat oven to 350 degrees F. Melt butter in large skillet on medium-high heat. Add mushrooms and onion; cook and stir until softened.
Mix milk, water and Gravy Mix in small bowl. Stir into mushroom mixture. Cook on medium heat until gravy comes to boil, stirring frequently. Reduce heat to simmer. Stir in 3/4 cup of the cheese. Simmer 1 to 2 minutes or until cheese is melted and gravy has thickened slightly.
Spoon into 1-quart baking dish. Sprinkle with remaining 1/4 cup cheese.
Bake 5 to 10 minutes or until cheese is melted. Serve with onion rings, fries or crusty bread.
