Yikes. You're right, this is a very delicate matter. I'm not sure if I can think of anything helpful (as in something you haven't tried/thought of already), but I'll take a stab at it.
Tell them that while you are honoured that they would want you to play such an important role in their child's life, that in good conscience you could do this as you believe as an Orthodox Christian believes, and not a Roman Catholic. Tell them that while you understand that there are important similarities between Orthodox Christianity and Catholicism, you understand that there are also important differences - to the point that while you recognize there are decent, kind people in the Roman Catholic Church (like your friends I imagine), you would not be able (both by conviction and by the instruction of your Church) to receive the ministrations of Roman Catholic clergy as you would those offered by the Orthodox Church. Tell them the truth - that you are an Orthodox Christian, thus if you were to be a child's Godparent, you'd be required (by conviction) to help them grow as an Orthodox Christian, not a Roman Catholic. Without implying that they do not take the role of Godparent seriously enough (whether it is true or not), simply say that you do take it very seriously, and it would make little sense for you to act as a guide and role model in a religion which is not your own.
Obviously, this situation is not the time to get into a debate about the errors of Catholicism or anything like this, and probably not a good opportunity to a hearty proclamation of the truth of Orthodoxy - though if the whole subject causes them to ask questions about the Church, I think it would be worth your while to give basic answers on what your believe, and if necessary say politely what you as an Orthodox Christian do not agree with in terms of Catholicism (though you should probably only do this if they press you, after stating the basics of your beliefs with the "well, that's no different than what we believe" type of response.)
Like I said, this is probably all stuff you've already thought of...but I hope there is something in there that is helpful.