Combine 2 cups flour with undissolved yeast, sugar and salt in a mixer bowl. Combine milk and butter; heat to very warm (120° to 130°F). Add to flour mixture; beat 2 minutes at medium speed, scraping bowl occasionally. Add egg and vanilla. Add in enough remaining flour to make a soft dough. Knead on lightly floured surface until smooth and elastic, about 6 to 8 minutes. Cover and let dough rest 10 minutes.
Divide dough in half. For body, knead chocolate morsels into 1 half; form into ball. Place on bottom end of greased large baking sheet; flatten to make 5-inch round. For head, remove 1/3 of remaining half; form into ball. Place on pan above body; flatten slightly, pinching to attach. For nose, pinch off 1/2-inch ball from remaining dough; place on center of head. Divide remaining dough into 4 equal pieces; roll each to form 6-inch rope. For arms, arrange 2 ropes across body; attach by tucking one end of each under body. Shape remaining ropes into ears; arrange above head. Attach by tucking one end of each under head. Cover; let rise in warm, draft-free place until doubled in size, about 30 to 45 minutes.
Bake at 350°F for 35 to 40 minutes or until done. Cool 10 minutes on pan; transfer to wire rack to cool completely. Decorate as desired.