Step 1

Melt butter in heavy medium skillet over medium heat. Add thinly sliced shallots and sauté 3 minutes. Reduce heat to low; sprinkle shallots with sugar, salt and pepper. Sauté until shallots are caramelized, about 15 minutes. Transfer shallots to small bowl. Add 1 1/2 cups wine to skillet; boil 1 minute.

Step 2

Pour wine into heavy medium saucepan; set over medium-low heat. Toss cheese with flour in medium bowl to coat. Add half of caramelized shallots to wine; add cheese mixture by handfuls, stirring until cheese melts and is smooth before adding more. Thin with more wine if mixture is too thick. Season with nutmeg, salt and pepper.

Step 3

Transfer cheese mixture to fondue pot. Set pot over candle or canned heat burner. Top fondue with remaining caramelized shallots. Serve with bread cubes.