I've thought about this before, and honestly the best solution is to eradicate the muggles by peaceful means. Think about it, if a witch/wizard couple breed, their offspring is a witch/wizard, if a witch or wizard breeds with a muggle, their offspring is also going to be a witch or wizard. Magical genes are a highly dominant trait, and if the magical community would make an effort to start breeding with the muggles, the world would be a much better place.
Just take over the sperm banks and secretly replace them with wizard spunk, seek out new couples who could do with another child and get the woman pregnant, and help out the couples where the man is infertile. Over time enough families will have a witch or wizard that the barrier between both worlds will be highly distorted and they can tear the walls down. At this point they could be incredibly aggressive and sterilize muggle males, but it would probably be better to release propaganda promoting the benefits of having magical children through wizarding sperm banks.
Would work too, I mean, how many parents would want to bring a child into this world knowing that it would effectively be of an inferior class, they would want to use the sperm banks and produce a child that is superior to the regular folk.
EDIT:
Also blood transfusions might possibly be an option, but I sort of doubt it. It's indicated that when one wizard takes on another wizard's blood, they can gain magical properties they didn't have but that the donor did have. So it's possible that if you gave a muggle a blood transfusion from a magical person that they could take on magical properties themselves.
I have doubts about this though because it would be such an obvious cure for squibs if it were true.