My fiance always says "I'd rather an ugly truth than a beautiful lie".
Those are words I live by now.
As much as I want to phrase things in a way that I don't unnecessarily hurt someone, I will not lie to them to spare their feelings. If I care enough about you to talk to you, I care too much to lie to you. People deserve to know the truth, and react accordingly. Even if it hurts. If I'm worried about how they will respond, I think that the best thing you can do is tell them in a gentle way, then be there for them afterwards, to support them, to listen to their concerns, to be a shoulder to cry on, to do whatever you can to help them get through.
A true friend doesn't lie to spare your feelings. A true friend tells you how it is, then helps you through it.
Of course, that's just my opinion, though.