Preheat oven to 325 degrees. In food processor, pulse nuts until they are finely chopped, or chop by hand. With a mixer, combine butter and vanilla, and mix until smooth, occasionally scraping the sides with a rubber spatula. Add the confectioners' sugar and mix for 2 more minutes. Then add the flour and mix just until combined and the dough holds together. Fold in the macadamia nuts.
Shape dough by measuring teaspoons into 3/4-inch balls. Place balls, 1 inch apart, on ungreased large cookie sheet. Bake cookies 20 to 22 minutes or until bottoms are lightly browned. Transfer cookies to wire rack and cool 5 minutes.
Sift remaining 1 cup confectioners' sugar into a pie plate. While cookies are still warm, roll in sugar to coat; return to wire rack to cool completely. When cool, gently roll cookies in sugar and then tap very lightly to remove any excess sugar.
Repeat with remaining dough and sugar. Store cookies in tightly-covered container at room temperature up to 1 week, or in the freezer up to 3 months.