The straight approach is the best - and if your friendship ends because of it, then it was built on sand in the first place.
I sypmpathise with the guy, but my experience with women has taught me one very valuable lession - if a woman wants you to develop a relationship with her - she will let you know. Similarly, if the signs are not there - and in this case they are clearly not! - then simply wishing does not change that.
Guys are very good at seeing something that is not there because they would like it to be - this is clearly the situation here. He needs to be advised what you are, and what you are not, and not going to be - and move on from there.
Good luck.