In a large skillet cook onion in butter over moderate heat, stirring, until softened. Add bell pepper and cook, covered, stirring occasionally, until pepper is softened, about 5 minutes. Stir in squash and garlic and cook, covered, stirring occasionally, until squash is tender, about 10 minutes. Stir in broth and bring mixture to a simmer. In a blender purée soup until smooth and transfer to a saucepan. Cook soup over moderate heat until just heated through, stirring in enough water to thin to desired consistency, and season with salt and pepper.
