Open squid.conf:
# vi /etc/squid/squid.conf
Local acl, section and append ACL as follows:
acl macf1 arp mac-address
acl macf2 arp 00:11:22:33:44:55
http_access allow macf1
http_access allow macf2
http_access deny all

Save and close the file. Restart squid server:
# /etc/init.d/squid restart

Thanks to cyberciti.biz

• Step #1 : Squid configuration so that it will act as a transparent proxy
• Step #2 : Iptables configuration
  • a) Configure system as router
  • b) Forward all http requests to 3128 (DNAT)
• Step #3: Run scripts and start squid service

First, Squid server installed (use up2date squid) and configured by adding following directives to file:
# vi /etc/squid/squid.conf

Modify or add following squid directives:
httpd_accel_host virtual
httpd_accel_port 80
httpd_accel_with_proxy on
httpd_accel_uses_host_header on
acl lan src 192.168.1.1 192.168.2.0/24
http_access allow localhost
http_access allow lan

Where,

• httpd_accel_host virtual: Squid as an httpd accelerator
• httpd_accel_port 80: 80 is port you want to act as a proxy
• httpd_accel_with_proxy on: Squid act as both a local httpd accelerator and as a proxy.
• httpd_accel_uses_host_header on: Header is turned on which is the hostname from the URL.
• acl lan src 192.168.1.1 192.168.2.0/24: Access control list, only allow LAN computers to use squid
• http_access allow localhost: Squid access to LAN and localhost ACL only
• http_access allow lan: — same as above –

Here is the complete listing of squid.conf for your reference (grep will remove all comments and sed will remove all empty lines, thanks to David Klein for quick hint ):
# grep -v "^#" /etc/squid/squid.conf | sed -e '/^$/d'

OR, try out sed (thanks to kotnik for small sed trick)
# cat /etc/squid/squid.conf | sed '/ *#/d; /^ *$/d'

Output:
hierarchy_stoplist cgi-bin ?
acl QUERY urlpath_regex cgi-bin \?
no_cache deny QUERY
hosts_file /etc/hosts
refresh_pattern ^ftp: 1440 20% 10080
refresh_pattern ^gopher: 1440 0% 1440
refresh_pattern . 0 20% 4320
acl all src 0.0.0.0/0.0.0.0
acl manager proto cache_object
acl localhost src 127.0.0.1/255.255.255.255
acl to_localhost dst 127.0.0.0/8
acl purge method PURGE
acl CONNECT method CONNECT
cache_mem 1024 MB
http_access allow manager localhost
http_access deny manager
http_access allow purge localhost
http_access deny purge
http_access deny !Safe_ports
http_access deny CONNECT !SSL_ports
acl lan src 192.168.1.1 192.168.2.0/24
http_access allow localhost
http_access allow lan
http_access deny all
http_reply_access allow all
icp_access allow all
visible_hostname myclient.hostname.com
httpd_accel_host virtual
httpd_accel_port 80
httpd_accel_with_proxy on
httpd_accel_uses_host_header on
coredump_dir /var/spool/squid

Iptables configuration

Next, I had added following rules to forward all http requests (coming to port 80) to the Squid server port 3128 :
iptables -t nat -A PREROUTING -i eth1 -p tcp --dport 80 -j DNAT --to 192.168.1.1:3128
iptables -t nat -A PREROUTING -i eth0 -p tcp --dport 80 -j REDIRECT --to-port 3128

Here is complete shell script. Script first configure Linux system as router and forwards all http request to port 3128 (Download the fw.proxy shell script):
#!/bin/sh
# squid server IP
SQUID_SERVER="192.168.1.1"
# Interface connected to Internet
INTERNET="eth0"
# Interface connected to LAN
LAN_IN="eth1"
# Squid port
SQUID_PORT="3128"
# DO NOT MODIFY BELOW
# Clean old firewall
iptables -F
iptables -X
iptables -t nat -F
iptables -t nat -X
iptables -t mangle -F
iptables -t mangle -X
# Load IPTABLES modules for NAT and IP conntrack support
modprobe ip_conntrack
modprobe ip_conntrack_ftp
# For win xp ftp client
#modprobe ip_nat_ftp
echo 1 > /proc/sys/net/ipv4/ip_forward
# Setting default filter policy
iptables -P INPUT DROP
iptables -P OUTPUT ACCEPT
# Unlimited access to loop back
iptables -A INPUT -i lo -j ACCEPT
iptables -A OUTPUT -o lo -j ACCEPT
# Allow UDP, DNS and Passive FTP
iptables -A INPUT -i $INTERNET -m state --state ESTABLISHED,RELATED -j ACCEPT
# set this system as a router for Rest of LAN
iptables --table nat --append POSTROUTING --out-interface $INTERNET -j MASQUERADE
iptables --append FORWARD --in-interface $LAN_IN -j ACCEPT
# unlimited access to LAN
iptables -A INPUT -i $LAN_IN -j ACCEPT
iptables -A OUTPUT -o $LAN_IN -j ACCEPT
# DNAT port 80 request comming from LAN systems to squid 3128 ($SQUID_PORT) aka transparent proxy
iptables -t nat -A PREROUTING -i $LAN_IN -p tcp --dport 80 -j DNAT --to $SQUID_SERVER:$SQUID_PORT
# if it is same system
iptables -t nat -A PREROUTING -i $INTERNET -p tcp --dport 80 -j REDIRECT --to-port $SQUID_PORT
# DROP everything and Log it
iptables -A INPUT -j LOG
iptables -A INPUT -j DROP

Save shell script. Execute script so that system will act as a router and forward the ports:
# chmod +x /etc/fw.proxy
# /etc/fw.proxy
# service iptables save
# chkconfig iptables on

Start or Restart the squid:
# /etc/init.d/squid restart
# chkconfig squid on

Desktop / Client computer configuration

Point all desktop clients to your eth1 IP address (192.168.2.1) as Router/Gateway (use DHCP to distribute this information). You do not have to setup up individual browsers to work with proxies.

How do I test my squid proxy is working correctly?

See access log file /var/log/squid/access.log:
# tail -f /var/log/squid/access.log

Above command will monitor all incoming request and log them to /var/log/squid/access_log file. Now if somebody accessing a website through browser, squid will log information.

Problems and solutions

(a) Windows XP FTP Client

All Desktop client FTP session request ended with an error:
Illegal PORT command.

I had loaded the ip_nat_ftp kernel module. Just type the following command press Enter and voila!
# modprobe ip_nat_ftp

Please note that modprobe command is already added to a shell script (above).

(b) Port 443 redirection

I had block out all connection request from our router settings except for our proxy (192.168.1.1) server. So all ports including 443 (https/ssl) request denied. You cannot redirect port 443, from debian mailing list, “Long answer: SSL is specifically designed to prevent “man in the middle” attacks, and setting up squid in such a way would be the same as such a “man in the middle” attack. You might be able to successfully achive this, but not without breaking the encryption and certification that is the point behind SSL“.

Therefore, I had quickly reopen port 443 (router firewall) for all my LAN computers and problem was solved.

(c) Squid Proxy authentication in a transparent mode

You cannot use Squid authentication with a transparently intercepting proxy.