How to Setup Transparent Squid Proxy Server in Ubuntu

Install Squid

Install squid and squid-common

sudo aptitude install squid squid-common

Edit the squid config file.

sudo vi /etc/squid/squid.conf

Set the allowed hosts.

acl internal_network src 192.168.0.0/24 (Where 192.168.0.0/24 is your IP range.)
http_access allow internal_network

Set the correct permissions.

sudo chown -R proxy:proxy /var/log/squid/
sudo chown proxy:proxy /etc/squid/squid.conf

You will need to restart squid for the changes to take affect.

sudo /etc/init.d/squid restart

Now open up your browser and set your proxy to point to your new squid server on port 3128

Authentication

If you wish to use authentication with your proxy you will need to install apache2 utilities

sudo aptitude install squid squid-common apache2-utils

To add your first user you will need to specify -c

sudo htpasswd -c /etc/squid.passwd first_user

Thereafter you add new users with

sudo htpasswd /etc/squid.passwd another_user

Edit the squid config file

sudo vi /etc/squid/squid.conf

Set the the authentication parameters and the acl
auth_param basic program /usr/lib/squid/ncsa_auth /etc/squid.passwd
auth_param basic children 5
auth_param basic realm NFYE Squid proxy-caching web server
auth_param basic credentialsttl 3 hours
auth_param basic casesensitive off

acl users proxy_auth REQUIRED

acl sectionx proxy_auth REQUIRED

http_access allow users

So this is what your squid.conf should look like.

acl all src 0.0.0.0/0.0.0.0
acl internal_network src 192.168.0.0/24
acl users proxy_auth REQUIRED
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 SSL_ports port 443 563 # https, snews
acl SSL_ports port 873 # rsync
acl Safe_ports port 80 # http
acl Safe_ports port 21 # ftp
acl Safe_ports port 443 563 # https, snews
acl Safe_ports port 70 # gopher
acl Safe_ports port 210 # wais
acl Safe_ports port 1025-65535 # unregistered ports
acl Safe_ports port 280 # http-mgmt
acl Safe_ports port 488 # gss-http
acl Safe_ports port 591 # filemaker
acl Safe_ports port 777 # multiling http
acl Safe_ports port 631 # cups
acl Safe_ports port 873 # rsync
acl Safe_ports port 901 # SWAT
acl sectionx proxy_auth REQUIRED
acl purge method PURGE
acl CONNECT method CONNECT

http_access allow manager localhost
http_access allow users
http_access allow internal_network
http_access deny manager
http_access allow purge localhost
http_access deny purge
http_access deny !Safe_ports
http_access deny CONNECT !SSL_ports
http_access allow localhost
http_access deny all
http_reply_access allow all
icp_access allow all

Redirect the all HTTP traffic.

If you would like to redirect the all HTTP traffic through the proxy without needing to set up a proxy manually in all your applications you will need to add some rules

iptables -t nat -A PREROUTING -i eth1 -p tcp -m tcp --dport 80 -j DNAT --to-destination 192.168.0.1:3128
iptables -t nat -A PREROUTING -i eth0 -p tcp -m tcp --dport 80 -j REDIRECT --to-ports 3128

Where eth1,eth0 are the LAN, WAN devices and 192.168.0.1 is the IP address of your LAN device.