I'm a big Tolkien fan, so it hurts me to say this, but maybe you should take some liberties with this. Unless your players are totally on-board with your changes, you might think about being more inclusive with their concepts.
Arcane classes. It's true that there aren't many examples of these in the books, except for the obvious Gandalf, Saruman, etc. And Gandalf wasn't even much of a D&D wizard. But if your players want to do this, I'd say let them do it. Find a way to make it work. The various Istari are quite poorly-defined outside of the big two. Radagast at least has a name, but the other two just wander "in the East." If you want to play one of these, it'd probably be a bigger roleplaying challenge than mechanics challenge, playing an ageless being from another world. Or, just be someone who was otherwise trained in magic. Who knows what the elves can do? Maybe you were trained at a secret institution founded by one of the Blue Wizards to weaken the forces of Sauron in a distant city never mentioned in The Lord of the Rings.
If you aren't starting soon, the Player's Handbook 2 will have the Primal power source, which looks like it'd work well in Middle-earth. Maybe you're of a druidic sect from Fangorn, or you practice ancient elven magic, or your powers haven't ever been seen before outside of the gardens of Valinor.
As for magic items, there are plenty of them in Middle-earth. Look
here and
here, for example. Any sword, spear, bow, etc. with a name is almost certainly magic in some way, and the elves have all sorts of magic worked into their crafts. Don't worry about giving out too much magic. Besides the Ring, Frodo had a magic sword, magic cloak, magic rope, magic phial, mithril armor, magic food, and that brooch could easily have been magic (but would of course compete for the Neck slot).
Interestingly, if you want to see how a high-magic version of The Lord of the Rings might look, check out the new "Conquest" game. They have orc and human mages, for Gandalf's sake! Clearly, D&D has also had an impact on people's imagining of Middle-earth.