In a mixing bowl, combine the milk and bread crumbs. Add ground beef, onion, egg, salt and pepper. Mix thoroughly and form into 1 inch balls.
In a large saucepan, combine chili sauce, grape jelly and water; bring to a simmer. Gently drop the meatballs into the chili sauce mixture and simmer for about 1 hour. Occasionally skim off excess fat, as necessary.
Stir in sour cream just before serving. Remove from heat before sour cream comes to a boil.