As a male who has been rejected every time (9+) I've ever liked a girl in a romantic way, I fully 100% say there is NO SUCH THING as "letting someone down gently". It is an impossibility. Rejection is a *****, it hurts, and there is no sugarcoating it.

In many cases, being "let down gently" hurts more than just being flat out told no. I've experienced both types of rejection before and it's incomparably easier following a blunt refusal than coping with a "you're a nice guy, but...." scenario. Those are the ****ed up situations that lead to problems down the road - still liking the girl, holding out for a chance you think you might still have, tension while being near each other, a lack of proper "closure" on the matter for the guy involved, the list goes on and on.

Tell your coworker the truth, don't beat around the bush with him. I know as a male I do not like when girls try to "be overly compassionate/nice/seemingly caring while crushing my hopes and affections". Say that you aren't interested, not compatible, what have you, from the beginning. Don't tell the man half a truth because it might seem easier on your end - because on his end, it's not.

Hope that little bit of insight helps.