I'd be hesitant to be so brutally honest if the friendship is important to you. If your friend truly believes he is talented, he's likely to not only become angry with you, but also blow off what you've said. So, he'll probably continue writing anyway, and you've damaged the friendship for nothing (except that you will no longer have to read the crap, which is saying something, I suppose).
That said, I wouldn't completely hide your concerns. I suggest telling him that you think he should find someone else to read his work, that you don't feel comfortable being candid, and that he may benefit from non-biased eyes. In other words, let someone else be the bad guy. Hopefully your friend will get a clue, and you won't run the risk of damaging the relationship.
And there's always a chance someone else will like his work...