Preheat oven to 350°F.
In large pot of boiling water, cook macaroni according to package directions for al dente. Drain and set aside.
In medium saucepan over medium heat, melt butter. Whisk in flour and cook 3-4 minutes. Gradually whisk in milk and cook 5-6 minutes, until thick and smooth. Remove from heat and stir in cheddar and mozzarella cheese. Season with Italian seasoning, salt and pepper.
Cut tops off peppers and remove ribs and seeds. Place peppers in a large baking dish and spoon macaroni mixture into each pepper, filling to the top. Pour 1/2 inch of water into baking dish. Bake for 40 to 45 minutes, or until peppers are cooked through. Let stand 5 minutes.
Garnish with chopped fresh basil before serving.