I've only had to turn someone down once, and I did so in a rather evasive manner. It was something along the lines of, ""I wouldn't be a good reference for you because I haven't worked with you long enough to be able to confidently recommend you. You'll be better off looking for someone that can give you a great personal recommendation, rather than the short, neutral recommendation I'd be able to provide."
But you could always go with the time tested, "I can't give you a recommendation. The last three guys that I gave a recommendation for were not accepted to their program, and I strongly suspect it was the bestiality humor I added to their recommendations. I mean who doesn't find that funny? Anyway, you'd better ask someone else."