Santiago,

Masquerading is a form of network address translation (NAT). Outside of iptables, masquerading is also commonly called port address translation (PAT). Any packet which leaves a particular interface of the router will have its IP header modified to use the source IP address of the exit interfaced used on the router. Try looking up PAT on wikipedia for a good description.

With your configuration of iptables, any packet leaving any interface on the router should take on the address of the interface which it left. I would think hosts on both of the 172 networks would have problems with reply traffic from hosts on different networks, and nodes on the 192 network would not be able to access hosts on the 172 network but would be able to reach the Internet.

As an example, suppose a PC on the 172.16.70.0 network pings the PC on the 192 network.

When the packet hits the router and is routed to the 192 network, the packet is NATed, and its source IP address changes to 192.168.1.224. The PC on the 192 network gets the ping, and replies to it normally (with a destination IP address of 192.168.1.224).

The router forwards the packet back to the ping originator on the 172 network, but masquerades the source IP address to 172.16.70.254 as it sends it out that interface. The PC on the 172 network is waiting for a reply from 192.168.1.32 -- getting an echo reply from 172.16.70.254 would sound like bogus traffic. Thus, it never receives a reply from the 192 node and you get an error message.

Unless my thinking is fuzzy or iptables is doing something else behind the scenes, it would sound like you only want to masquerade for traffic going out of the 192 interface of the router. Try it out and see if it works as it is. If not, you can tell iptables to only masquerade for traffic leaving the 192 interface by using the '-o <INTERFACE NAME>' option within the iptables command string you posted earlier.