Place the marshmallows and water in a large bowl and heat in the microwave in 1-minute intervals, stirring between each, until the marshmallows are totally melted.
Add the powdered sugar 1 cup at a time until a stiff dough forms.
Knead the fondant, using extra powdered sugar to keep it from sticking, until it is smooth and no longer tacky.
Add food coloring, if using.
Roll the fondant to ⅛-inch thickness and use it to cover a frosted cake or cut out shapes.