That's an interesting question, because I just recently taught a co-worker to knit. I can knit continental, but I taught her the "throw" method because that's what I do better, and I can't purl continental to save my life. Here's what I learned from the experience:
Tell your learner that it's OK if their knitting doesn't look perfect right away. I told my co-worker over and over that tension is one of the hardest things to get and that she will get better in time.
Teach one thing at a time. I taught her to cast-on and let her practice that several times and then taught her the knit stitch. That was one lesson. I then let her practice just knitting for quite awhile so she could really get it down.
The second lesson was purling. She then practiced doing stockinette for a while. I explained to her about the nature of stockinette to roll and showed her how to use stitch markers to delineate a garter stitch border. She made a scarf and I showed her how to bind off.
I also got her to sign up on Ravelry, and showed her Knitting Help which she tells me she has used quite a bit.
She has now gone on to make a scarf without my help that includes increases and decreases. It's this one. She's really taken to it. But that doesn't mean everyone will. I taught another person to knit who ended up just hating it and that's OK.
I think the two most important things are to make sure you keep encouraging your student, and to make sure that you try to leave the needles in her (or his) hands as much as possible. People learn by doing, not by watching, and so when I was showing my learner how to knit, I sat next to her with my own needles and yarn and had her watch and repeat the motions at the same time, instead of just asking her to watch me and then having her do it. I think that made the biggest difference.
Good luck to you! I hope you have a wonderful experience teaching your friend to knit.
ETA: I forgot to talk about needle and yarn type! I loaned her a pair of straight size 8s and had her get some light colored, smooth worsted weight wool to start with. I brought in a pair of metal Boye needles and some bamboos so she could decide for herself which she preferred. She liked the Boyes better. I think the most important thing is to have smooth and light colored yarn--it's easier to tink and it it's easier to see your stitches. It lets you get the motions of knitting down without getting caught up in fuzzy tangliness.