Best thing is to get married asap and then wait till 245(i) is extended. There is every likelyhood that it will be extended soon. It will be better for her not to travel outside the United States till she gets her Green Card otherwise she can be subjected to 10 years bar. Good luck.
Umesh is right, but let me fill in a little background info for you. Right now, since your fiance is already here and has been out of status for more than a year, if she leaves she will be subject to a ten year travel bar (i.e., they won't let her back in for ten years). Although it is possible to ask for a waiver of this, it is risky at best (they are most commonly given when the person the waiver is for is married to a USC, and where children are involved (in other words, where refusing to grant the waiver is pretty well going to tear a family apart)), as the person will have to leave before you can apply for the waiver. Unfortunately, under the current laws, there is no way for her to become a legal permanent resident here in the states (i.e., "adjust status") because she came in "without inspection" (i.e., illegally). So, even though you could theoretically have her leave and apply for a fiancee visa (or, if you marry first, a regular old family relative visa), your best bet is to go ahead and get hitched, and wait/hope for 245(i) to come back. So you know, 245(i) is a law that used to allowed undocumented aliens to adjust status here in the U.S. However, it expired on April 30, 2001, so currently it is only available to those who filed petitions prior to that date.
One advantage of getting married now is that it will let you go ahead and start establishing that your relationship is bona fide (be sure to keep copies of everything you get in the mail that has both your names on it, get your bank accounts and property jointly titled, and do whatever else you can to show you are acting as man and wife while you are waiting for 245(i) to come back). Another advantage is that, if a couple has been married less than two years before the alien becomes a LPR, the alien's LPR status is "conditional" on the couple staying together another two years, and you have to file extra paperwork to get the condition removed. If you get married now, you increase the odds that you will have been married more than two years before she becomes an LPR.
On the whole, I am with Umesh in thinking that 245(i) will eventually be reenacted. However, I am not as optimistic that it will be soon, so be prepared for a wait. At any rate, good luck to you.