The basic rule with regard to lying is that it is not permitted, but there are certain circumstances in which Islam permits lying to serve a greater purpose or to prevent harm.
One of these situations is when a person mediates between two disputing parties in order to reconcile between them, if reconciliation cannot be achieved in any other way. Um Kalthoom (may Allaah be pleased with her) reported that the Prophet (peace and blessings of Allaah be upon him) said: “He is not a liar who reconciles between people and conveys something good or says something good.”
(Reported by al-Bukhaari, 2495).
Another example is a man’s speaking to his wife, or a woman speaking to her husband, with regard to matters that will strengthen the ties of love between them, even if that is accompanied by exaggeration. Asma’ bint Yazeed said: “The Messenger of Allaah (peace and blessings of Allaah be upon him) said: ‘Lying is not permitted except in three cases: a man’s speaking to his wife to make her happy; lying at times of war; and lying in order to reconcile between people.’”
(Reported by al-Tirmidhi, 1862; he said: it is a hasan hadeeth. See also Saheeh Muslim, 4717).
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MISCONCEPTION:
Many take the permission of the Prophet 
to lie in three exceptional cases in the wrong way as a justification for white lies. The Prophet said: "A liar is not one who tries to bring reconciliation amongst people and speaks good (in order to avert dispute), or he conveys good." [Muslim]
Commenting on this Hadeeth, Ibn Shihaab, one of the transmitters, said that he has not heard that the exemption was granted with regard to the typical lies that people tell but in three cases: In war in order to cause reconciliation among people and in the narration of the words of the husband to his wife, and the narration of the words of a wife to her husband (in a euphemistic way in order to cause reconciliation between them).
Some may take this as a license to take truthfulness lightly and tell what they think to be white, harmless lies. The case is the opposite. What people misunderstand is the Arabic usage of the word `kadhib.' In particular in the Prophet's usage of it `kadhib' means anything less than the complete truth, even if it is not a lie in our ordinary usage of the term. This becomes clear in the following Hadeeth narrated by Muslim:
The Prophet said: "Ibraaheem 
never `lied' except in three cases, two for Allaah, when he said [as an excuse when asked by his people to join them in celebration of their idols] `I am sick'; and [when they came back and asked who broke their idols, he said] `Rather, it was the biggest among them who did that.' And the third was about Saarah, and that was his saying: `When he asks you, say you are my sister, because you are my sister in Islam.' [Muslim]
Imaam an-Nawawi explains that these lies were "lies only with regard to the understanding of their immediate audience, but not in and of themselves." Ibraaheem indeed was "sick" of their idol-worship, and his response that it was the biggest idol who broke the rest was simply a rhetorical ploy, which is not ordinarily considered a lie in our speech. For instance, when a friend sees you sipping on a cup of tea and asks, "What are you doing?" and you say: "What do you think? I am flying in the air"—that is not a lie, but a rhetorical expression to convey your annoyance. The Prophet Ibraaheem made this clear in the third example by adding that Saarah was his sister "in Islam," for she, indeed, was. But the Prophet still called it a lie because it was less than the whole truth.
The scholars of Islam agree, reports Imaam an-Nawawi, that a Muslim is permitted, indeed, required, to hide an innocent or wrongly persecuted person from oppressors, and if he must lie in this pursuit, he can. But even in such cases, lying should be avoided if possible. Abu Bakr al-Siddeeq the most truthful man of the ‘Ummah who accompanied the Prophet on his flight to Madeenah, was accosted by an acquaintance of his who did not know the Prophet by face but had probably heard of the Makkan search for him. He asked Abu Bakr 
about his companion, to which Abu Bakr said: "He is my guide. He shows me the way." Abu Bakr did not lie even in such dire circumstances, but simply equivocated.
The case of "lying" allowed for a husband speaking to his wife (or vice versa) is similar. When a wife asks her husband if he loves her or thinks she looks beautiful, the answer is not always clear even to the husband. Depending on his state of mind and their relationship, the woman who looks perfectly beautiful and loveable to him most of the time might look not so at the moment. Especially, when influenced by Satan's whispers, one's wife often looks less attractive than other women, even if the opposite is true.
Since the usual standard of truthfulness in Islam is so meticulous and high, the husband is allowed to say what pleases her or helps reconcile her heart, even if at that moment he does not feel exactly that way.
Saying that he loves his wife is likely in fact to recall in his mind what he loves about her and bring happiness and incite more love in her heart. Thus, the statements made to please one's spouse are not, strictly speaking, "lying" in our ordinary usage.
With this exception, lying to one's spouse in any other situation or any other way is as prohibited and despised as in any other. A relationship built on lies cannot last for very long, let alone be blessed with "mercy" and "love" that Allaah promises to place between spouses [Quran 30:21].
Finally, take the case of war. War is fought to overcome and often destroy the other side. But even in this situation, the rule in the Quran is to never deceive in principle. People often misunderstand what the Prophet famously said, namely, that "War is khud'ah (stratagem)." Khud'ah is stratagem, a tactical maneuver to mislead the enemy. It is not treachery, deception, or breach of agreement, which would be khiyaanah, and Allaah emphatically prohibits that.
Allaah Almighty Says (what means): {If you fear treachery (khiyaana) from any group, openly throw back (their covenant) to them, (so as to be) on equal terms: for Allaah loves not the treacherous.} [Quran 8:58]
Imagine the level of integrity required, such that even when you fear the enemy's breach of treaty and attack, you do not simply unilaterally end the treaty and attack them, but, rather, let your enemy know that the treaty is over.
What the Quran and Hadeeth teach us is that the requirement in Islam of truthfulness and integrity is so high and the agreement between our outsides and insides must be so meticulous that even equivocation, telling half the truth, and evading the straightforward fact is termed as kadhib, a lie. Under normal circumstances, such differences between one's words and true feelings would be considered lying, but they are allowed in uniquely exceptional circumstances.
Source: http://www.islamweb.net/emainpage/index.php?page=articles&id=179241
