How to remove index.php from Magento URLs using .htaccess

1) Login to admin section by using the URL http://domain.com/index.php/admin

2) then go to “System >> Configuration >>Web >> Search Engines Optimization”

Use Web Server Rewrites : YES

3) Go to “System >> Configuration >>Web >>Secure”

Use secure URL Frontend: YES (Optional)

4) Then create the .htaccess file under your the magento installed folder.

If the magento installed under document root ( /home/username/public_html) then add follogig rules into .htaccess file

<IfModule mod_rewrite.c>RewriteEngine On
RewriteBase /RewriteRule ^index\.php$ - [L]
RewriteCond %{REQUEST_FILENAME} !-f
RewriteCond %{REQUEST_FILENAME} !-d
RewriteRule . /index.php [L]</IfModule>

and If the magento installed under /shop or directory then add the following rules into ” /home/username/public_html/shop/.htaccess ” file.

<IfModule mod_rewrite.c>RewriteEngine On
RewriteBase /shop/RewriteRule ^index\.php$ - [L]
RewriteCond %{REQUEST_FILENAME} !-f
RewriteCond %{REQUEST_FILENAME} !-d
RewriteRule . /shop/index.php [L]</IfModule>

Finally found this solution here:
http://www.magentocommerce.com/boards/viewthread/22199/P15/