Personally I feel that children should be told the truth where possible, yes cancer can be scary but a lot of the fear comes from the unknown. My sister was very young when my dad was first diagnosed but was told the same as me, and we were told what was wrong, what treatment he was having and were even able to see him have his chemo. It just emant that it was a real illness dad was fighting, not some scary thing. Children are tougher then adults I think.
However in my xcase it was a close family member but if you are going to see your friend alot I would just explain what cancer is and why her hair has fallen out etc but in easy to understand terms.