In a small saucepan, saute onion in butter until tender. Add squash and potato; cook and stir for 2 minutes. Add the water, bouillon, salt and pepper; bring to a boil. Reduce heat; cover and simmer for 15-20 minutes or until vegetables are tender.
Cool slightly. In a blender, cover and process soup until smooth. Return to the pan; stir in milk and heat through.