I think a better policy is to do the most good. Honesty usually, but not always, is the best way to bring about that goal. At times people ask you a question not in the hopes of hearing a brutally honest answer but rather to validate themselves or soothe a wounded ego. If mild dishonesty will do more good than the blunt truth, I will go with the mild dishonesty.

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Example1:
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A woman squeezes into a slinky dress that used to look really sexy on her and that used to be one of your favorites. She's gained a few pounds and it just doesn't really flatter her like it once did. She turns to you and asks the dreaded: "Does this dress make me look fat?"

I would answer, "No, but I really was hoping you'd wear the XXX one as it really sets off the color of your eyes/hair/skin etc".

Technically, the "No" was a lie. The mere fact that I didn't jump at the formerly beloved sexy dress conveys the information without making it an insult so it at least partly cancels out the deception. My answer let me turn a potential insult into a loving compliment, and would make her happier than if I had said "Yes, it makes you look H-U-G-E!". I would assume she isn't utterly dense and would get the meaning without having to corner me into saying something unpleasant. If she pressed or was oblivious to my intentions, I might give in and tell the truth because she obviously wants to hear it rather than accept a polite redirection.

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Example 2:
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Your friend spends days working on his resume to apply for a new job. He's convinced that it is his masterpiece and he proudly shows it to you with a flourish. You look it over and realize that it's a mess. He then asks with a grin, "What do you think? Pretty good, huh?"

I would answer, "Yes, it's great but there are a few things I'd suggest changing". I'd then whip out the red pen, mark it up and provide detailed feedback.

Technically, my initial "Yes" was a lie. However, the lie let my friend save face and I still came through with the much needed feedback so the entire experience was a positive. My lie hurt nothing and likely helped put my friend in a more receptive mood to listen to my feedback. Had I said "No, it really sucks", I would have caused pain for no good reason.

In my opinion, clinging to naked brutal honesty even when it will cause pain can at times be an act of selfish egotism rather than a virtue. A person who never tells a white lie is cruel and apparently places a greater value on their own self image than they do in helping others. One should not butcher the truth for selfish reasons or to avoid blame, but a bit of twisting and stretching to spare someone else pain is often OK, especially if you follow the white lie with enough truth to be helpful.

Mark Twain wrote a great essay on this issue called "On the Decay of the Art of Lying". It's a great short read for anyone interested in this conundrum, and is available for free at the site I linked it to.