As an observer, I'm curious to know why you would be concerned about this matter affecting the relationship. Is there a possibility that simply saying "no" to her will ruin the dynamic you currently have?
The present responses should answer your question adequately about how to broach the topic. On the other hand, I don't agree that you should give her a decision without reason because it could potentially result in a discord in your communication and relationship. She's asking a yes or no question, there's only one way it can go. It's not the "no" that will upset her, it's the "why."
To further simplify, be sincere and genuine.
Voice your concerns about it, and don't worry too much about letting her down easy - she's already married, after all. If you prefer to be tactful, perhaps invite her and her husband to dinner with the purpose of discussing their reasoning behind asking you to be the donor. Hear them out first, give them your decision, then let them hear you out. Be straightforward about it and bring up your continued friendship as one of your concerns.
After hearing them out:
I want to let you know, I've made a decision. The answer is: no. While
I'm flattered, I've thoroughly considered all the short and long term
effects of a decision such as this, and I'm afraid the risk is just
far too great for me.
Cite your future plans and that the knowledge of having fathered a child as a donor would affect your emotional well being ten, and even twenty, years from today.
She's not a stranger, she's a friend, and with friends it's important they truly know where you're coming from.