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Let's just take all the advice about paternity tests and such as a given, and assume that the baby exists and is his. If that proves not to be the case, disregard this.
Here's where we get to hear those words that everyone loves to hate: personal responsibility. Your friend has not only a moral but a legal obligation to his child. This woman has every right to money to help support the child, and will most likely not hesitate to take him to court over it.
The best course of action is probably the one that you least want to hear: if he owns up to this and goes to court, he can make sure there is a structured settlement in place. He'll have a fixed amount per month that he's responsible for and apart from that can effectively cut the girl and the kid out of his life. No worries about blackmail or extortion. On the other hand, if he leaves things as they are or tries to keep quiet, she'll likely squeeze him for as much as she can get and then take him to court anyway when he doesn't have anything left for her to get out of him.
Bottom line is your friend fucked up. Now he has to deal with it. That's how life works.
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I wake up in the morning more tired than before I slept
I get through cryin' and I'm sadder than before I wept
I get through thinkin' now, and the thoughts have left my head
I get through speakin' and I can't remember, not a word that I said
- Ben Harper, Show Me A Little Shame
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