In a small bowl, sprinkle gelatin over ½ cup of the water and let stand for 5 minutes. In a small saucepan, bring sugar and remaining water to a boil over medium heat, stirring constantly.
Add the gelatin and reduce heat. Simmer and stir for 5 minutes. Remove from the heat and stir in peppermint extract.
Divide mixture into two small bowls. Add 6 drops of green food coloring to one bowl and 6 drops of red food coloring to the other. Pour into two greased 8×3.75-inch loaf pans. Chill for 3 hours or until firm.
Loosen edges from the pan with a sharp knife and turn onto a sugared cutting board. Cut into ½-inch cubes and roll in sugar. Let stand at room temperature, uncovered, for 3 to 4 hours, turning every hour so all sides dry. Cover and chill.