It doesn't have to be that complicated. Just tell the other girl that you just want to be friends. You don't have to say anything about the other girl or explain anything else. There is no nice way to tell her that you're choosing someone else over her, so I wouldn't bother taking that route.
If the two girls are friends then you won't really have a choice. But if they don't know each other or only hang out once and a while, then it won't be a problem. Just date the other girl and let her find out when she finds out.
This way you don't have to lie to her, and you don't have to tell her about the other girl, which would only throw salt onto her wounds if she takes it hard.
Good luck!