In a small saucepan over medium heat, combine water, sugar, salt, and butter.
Bring to a boil and remove from heat. Immediately stir in flour and mix until it forms a ball.
Heat oil for frying in deep-fryer or deep skillet to 375 degrees F.
Pipe strips of dough four inches long into hot oil using pastry bag. Fry until golden (about 10 minutes, constantly flipping); drain on paper towels.
Combine 1/2 cup sugar and cinnamon. Roll drained churros in cinnamon sugar mixture.
Warm the caramel over medium heat in a small sauce pan and serve with the churros.