I've designed a circuit that did almost the same thing several years ago. Mine would mute the audio anytime the phone was off the hook (which means even if somebody took it off in another room). Basically, it worked by monitoring the line voltage of the telephone. As I recall it is something like 48V when the phone is on hook and 10V when off hook. I used a comparator with my supply to figure out what the status was. To handle the AC that is on the line during ringing, I added a little front end that would block AC from reaching the circuit. After all this, the comparator drove the base of a transistor, which activated a relay. The relay then broke the connection on the pre-out -> main-in loop on my receiver.