Cook the Spaghetti: Bring a large pot of lightly salted water to a boil. Cook spaghetti for 8–10 minutes or until al dente. Drain and set aside.
Prepare the Meat Sauce: In a large skillet over medium-high heat, sauté the onions, green peppers, and ground beef. Cook until the beef is browned and the vegetables are softened. Drain any excess fat from the skillet. Stir in diced tomatoes, mushrooms, and oregano. Simmer uncovered for 10 minutes.
Assemble the Casserole: Preheat the oven to 350°F (175°C). Grease a 9×13-inch baking dish. Place half of the cooked spaghetti into the baking dish. Layer half of the meat mixture on top and sprinkle with 1 cup of Cheddar cheese. Repeat layers.
Add the Topping: In a medium bowl, mix the cream of mushroom soup and water until smooth. Pour this mixture evenly over the casserole. Sprinkle with Parmesan cheese.
Bake and Serve: Bake in the preheated oven for 30–35 minutes. Let the casserole stand for 10 minutes before serving.