Cook the shallots in a medium saucepan of boiling water for about 5 minutes to loosen the skins. Let cool slightly, then peel them.
Heat the oil in a large skillet. Add the shallots and cook over moderately high heat for 5 minutes. Reduce the heat to moderately low and cook, shaking the skillet and turning the shallots, until lightly browned, about 5 minutes longer.
Bring the 2 cups of water to a boil in a saucepan. In a medium heatproof bowl, combine the tamarind with the sugar, add the boiling water and stir until the sugar dissolves. Pour the tamarind mixture over the shallots and stir well. Cover the skillet and cook over low heat until the shallots are soft, about 25 minutes. Add water as needed to keep the shallots from drying out.
Using a slotted spoon, transfer the shallots to a plate. Cook the sauce over high heat until reduced to a glaze, about 10 minutes. Return the shallots to the skillet and toss to coat in the glaze. Season with salt and pepper and let cool. Cover and refrigerate for at least 1 hour or overnight. Serve cold.
Note: Tamarind concentrate is available at Asian markets or sometimes in the ethnic isle of the grocery store.