Place milk, water, butter, egg, sugar, salt, flour and yeast into bread machine pan in exact order listed. Do not stir!
Insert baking pan securely into baking unit, close lid, select dough setting and push start.
When cycle is complete, remove dough from pan and transfer to lightly floured surface.
Using rolling pin lightly dusted with flour, roll dough to ½ inch thickness.
Cut with floured dusted donut cutter or circle cookie cutter.
Transfer donuts to baking sheet that has been covered with wax paper. Place another layer of wax paper on top, then cover with clean tea towel. Let rise 30-40 minutes until slightly raised.
While donuts are rising heat vegetable oil to 375º (190ºCº) in deep fryer or large heavy pot.
Fry donuts 2-3 at a time until golden brown on both sides. About 3 minutes.
Drain on paper towel.
Sprinkle with granulated or confectioners sugar