Sorry, I have been busy in Real Life (TM)
Your ip_forward looks good.
For your iptables -L -nv -t nat output, the eth0 does not need to be redirected to tcp 3128. I'm assuming eth0 goes to the internet/public.
You only need to forward/redirect your eth1 (LAN) to tcp 3128 squid.
As for blocking bittorrent, I set my iptables a bit different and probably not suitable for your setup. Basically I do not masqurade all clients out, only selected client IPs to selected ports only.
Also in my iptables FORWARD i explicitly deny all high ports not destined for the LAN, something like this:
iptables -A FORWARD -p tcp -s my.lan.network/24 --sport 1024:65535 -d ! my.lan.network/24 --dport 1024:65535 -j REJECT
iptables -A FORWARD -p udp -s my.lan.network/24--sport 1024:65535 -d ! my.lan.network/24 --dport 1024:65535 -j REJECT
I've heard about L7 iptables but to be honest have not used one.
Perhaps this link could shed some light.
I'm not sure is squid can block bittorrent, perhaps or possibly it is possible but i'd imagine your acl needs to some configuration to block them