Bring water to a boil in medium saucepan. Coarsely crumble potatoes and add to water; mix well. Cover; simmer 15 minutes.
Stir in milk and contents of sauce mix packet from potatoes. Reduce heat to medium; cook 5 to 8 minutes or until thickened and thoroughly heated, stirring frequently.
Stir in sour cream; mix well. Top individual servings with cheese, bacon and chives.