It would be the honest thing to do so she can move on
Yes tell her. Like Sourgrapeeater said, try to be nice to her..but if being nice doesn't clue her in, be a little more abrasive and give to her straight instead of just sugar coating it.
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Yes. Don't hurt her by lying. Be honest and try to tell her in the most honest way possible. She will understand. She might be upset at first, but eventually, if she is a good friend, she will understand if you be honest with her.