both reasons,

you do it to not hurt their feelings. But you also do it so you don't feel uncomfortable hurting their feelings.
I don't think it's necessarily bad, sometimes it's good to avoid unnecessary drama. But sometimes you gotta be careful, because lieing can open up a whole new can of worms.

A rule of thumb I would suggest is to think about the big picture of your action. Would lying about something cause even more pain to the person you're lying in the future? To other people?

For example, say a friend is being difficult with your other friends, without being aware of it.

If you tell your friend the situation, that might hurt your friend's feelings, but that could avoid a potential blow up later and save your other friends some pain too. On top of that, you should consider how you actually execute your confrontation will affect things.

Once you've considered those things, follow a utilitarian mindset and do whatever you're going to do.