Please don't tell her that she has a bad voice.. that would hurt her feelings and probably irreparably damage your friendship. Try telling her that people look at you when she sings and it makes you feel awkward. If it bothers you when she sings when it is just the two of you, where is the harm? In life, sometimes we put up with things that we don't necessarily like to spare those that we love pain.
Try to understand why she enjoys singing so much. Ask her if she sings for others or for herself. If you are her friend then assist her to find a way to help others including you to appreciate her reasons.