In a small bowl, combine water, 1 teaspoon sugar, yeast and 1/4 cup flour. Stir well to combine. Cover with tea towel, and set aside to proof for 15 minutes.
Combine the yeast mixture with sour cream, butter, egg, salt and vanilla in the bowl of a stand mixer. Add 2 1/2 cup flour and mix with the paddle attachment until the dough is a rough, shaggy mass.
Switch to the dough hook and knead on until a soft and smooth dough forms, about 5 to 6 minutes. Place the dough in a lightly greased bowl, cover with tea towel, and allow to rise for 90 minutes.
While dough is rising, prepare the caramel sauce by combining sugar and water in a heavy saucepan set over low heat, cook until the sugar is dissolved. Add the butter. Let it come to a boil and cook until it reaches a golden caramel colour. Remove from the heat and add the cream slowly. Be careful as it will splatter. Whisk to combine and put back on the stove. Let it come to a boil again over low heat and cook 10 to 15 minutes until you reach a nice creamy consistency.
Pour half of the caramel sauce into the pan. Sprinkle half of the walnuts on it. Set aside.
Gently deflate the dough. Shape it into 40 balls.
Combine cinnamon and sugar to make cinnamon sugar. Working one at a time, dip balls in melted butter, then roll in cinnamon sugar. Layer 20 balls in tube pan, staggering seams where dough balls meet as you build layers.
Top with remaining caramel and walnuts. Continue with the remaining dough balls. Cover and let rise until doubled, about 45 minutes.
Heat oven to 350F. Uncover pan and bake until top is deep brown and caramel begins to bubble around edges, 30 to 35 minutes. Cool in pan for 5 minutes, then turn out on platter and allow to cool slightly. Serve warm. (Do not let the bread cool in the pan for more than 5 minutes or it will stick to the pan and come out in pieces)