In a medium mixing bowl, mix together the lukewarm milk, water, sugar, and yeast. Let sit for 5 - 10 minutes until the yeast is foamy. If the yeast does not foam, it may be inactive and you should start again with new yeast.
Add the flour, salt, and egg to the bowl. Mix until it comes together into a loose dough. Slowly add the butter, kneading between each addition to incorporate.
If using a stand mixer, knead for 15 - 20 minutes on medium-low speed using a dough hook. You can also knead by hand. Feel free to add 1 - 2 tbsp of flour, but in general it should be quite a soft dough.
Place the dough in a lightly greased mixing bowl and cover with plastic wrap. Let rise for 60 - 90 minutes until doubled in size.
Sprinkle a working surface with flour. Punch the dough down to release air and turn onto the floured surface. Divide into 4 equal pieces. Shape each piece into a ball and roll into a circle 8 - 10 inches in diameter. Flour the dough and your rolling pin to avoid stickiness.
Prepare the filling. Microwave the Nutella for 30 seconds to make it easier to spread. Place the candies in a plastic ziptop bag and crush into small pieces using your rolling pin.
Place your first circle of dough onto a sheet of parchment paper. Spread the surface with Nutella and sprinkle with crushed peppermint candy. Place your second circle of dough on top. Repeat the layers of dough and filling until the final layer of dough, which should be uncovered. You should have 4 layers of dough and 3 layers of filling. Trim off any rough edges around the circle.
Gently press a glass 2 - 3 inches in diameter into the center of the circle to create an imprint. This imprint will serve as a guide for the end point of your dough strips. Use a knife to cut 16 even dough strips around the circle. Take 2 pieces of dough that are next to each other, one in each hand. Twist outwards twice and pinch the ends together to form one point of your star. Repeat with the remaining dough strips to create an 8-pointed star.
Preheat your oven to 350°F. While the oven is preheating, let the loaf proof for another 20 minutes. Beat together the egg and milk to create an egg wash. Brush the top of the star bread with egg wash and bake for 20 - 25 minutes until golden brown and makes a hollow noise when tapped.
Remove from the oven and sprinkle with powdered sugar. Enjoy warm!