Hi there-
I have actually had to do this twice already so here is what I did:
My first decline was to a professor I had been in contact with since last August and who had been great in recruiting me and helping me during the application process. I phoned him since it seemed more personal than an email. I followed up with a formal written decline letter that I faxed to the department, which is suggested in the "rule book" on these situations.
My second offer I declined I did with an email, since I felt less "connected" to this professor. I also followed this up with a formal written letter.
In these emails/phone calls, I tried to thank them as sincerely as possible for their time, interest in me, and support of me. I emphasized the difficult decision I had to make, and how tough it was for me to decide between two particular schools. They both asked me where I had decided to go, and were both extremely supportive about my decision.
It's a difficult process to decline, so good luck! I actually had to take an hour to work myself up to call the first professor because I know he was really invested in me coming to his school.