Linux: Setup a transparent proxy with Squid 2.6 in three easy steps

Server Configuration
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 –

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