What is the best way to prevent session hijacking?

Specifically this is regarding when using a client session cookie to identify a session on the server.

Is the best answer to use SSL/HTTPS encryption for the entire web site, and you have the best guarantee that no man in the middle attacks will be able to sniff an existing client session cookie?

And perhaps second best to use some sort of encryption on the session value itself that is stored in your session cookie?

If a malicious user has physical access to a machine, they can still look at the filesystem to retrieve a valid session cookie and use that to hijack a session?

Encrypting the session value will have zero effect. The session cookie is already an arbitrary value, encrypting it will just generate another arbitrary value that can be sniffed.

The only real solution is HTTPS. If you don't want to do SSL on your whole site (maybe you have performance concerns), you might be able to get away with only SSL protecting the sensitive areas. To do that, first make sure your login page is HTTPS. When a user logs in, set a secure cookie (meaning the browser will only transmit it over an SSL link) in addition to the regular session cookie. Then, when a user visits one of your "sensitive" areas, redirect them to HTTPS, and check for the presence of that secure cookie. A real user will have it, a session hijacker will not.

EDIT: This answer was originally written in 2008. It's 2016 now, and there's no reason not to have SSL across your entire site. No more plaintext HTTP!

The SSL only helps with sniffing attacks. If an attacker has access to your machine I will assume they can copy your secure cookie too.

At the very least, make sure old cookies lose their value after a while. Even a successful hijaking attack will be thwarted when the cookie stops working. If the user has a cookie from a session that logged in more than a month ago, make them reenter their password. Make sure that whenever a user clicks on your site's "log out" link, that the old session UUID can never be used again.

I'm not sure if this idea will work but here goes: Add a serial number into your session cookie, maybe a string like this:

SessionUUID, Serial Num, Current Date/Time

Encrypt this string and use it as your session cookie. Regularly change the serial num - maybe when the cookie is 5 minutes old and then reissue the cookie. You could even reissue it on every page view if you wanted to. On the server side, keep a record of the last serial num you've issued for that session. If someone ever sends a cookie with the wrong serial number it means that an attacker may be using a cookie they intercepted earlier so invalidate the session UUID and ask the user to reenter their password and then reissue a new cookie.

Remember that your user may have more than one computer so they may have more than one active session. Don't do something that forces them to log in again every time they switch between computers.