You need to sit her down, at a time and place where both of you can be calm and say something like this, “Angela, you and I have been friends for a long time and I love you like a sister, but sometimes you exaggerate things and tell out-right lies.” (at which time she will probably protest and you need to have at least 2 good examples to “remind” her of what she said, and why they are exaggerations or lies) then continue to say, “I would really like to remain friends with you, but it’s making me more and more un-comfortable to listen to you exaggerate and make up things. And it’s gotten in the way of my friendships and relationships with other people.” (provide another specific example or 2 right here) then continue with, “I wish you would just be yourself, or at least explain to me why you need to lie and exaggerate.” Hopefully she’ll explain why right here, but if she doesn’t or yells at you that she doesn’t do it, then continue with, “Like I said, I want to continue to be friends with you, but if you don’t stop doing this, I’m going to have to limit my time with you or even think about simply moving on. Do you want to talk about this?”
This may be a very difficult conversation to have, but I think it’s the only way to get to the bottom of why she does this, or to figure out that she isn’t going to admit it, and in that case, you probably have to move on from your friendship with this girl.
I suspect that she is probably desperate for love and friendship (and a boyfriend of her own) and she thinks that by making up stuff, that she will appear to be more desirable or interesting to you and other people and guys. Clearly this hasn’t worked, but I think desperation is the basis for all of this. You are probably more popular with other girls and you have had boyfriends, while she maybe has not. When you are in school, being popular (or even just being liked) is extremely important. Your friend is probably just trying to “have what everybody else seems to have” but not going about it in the right way.
If you talk to her and choose to walk away from the friendship, be as kind and gentle as you can.