This is a very hard one sometimes. It's best to keep an arsenal of wittiness in one's pockets for just such occassions. Being fast on your feet helps a bit too, because that'll help you to pull the funny out of any thing being said or done. Because if all fails and the damn breaks and the guffaws ensue, which they sometimes do, you have to have something to justify it and quickly.
Barring that, honesty, as painful as it may be, might be the only other alternative.
"Man, that was the most ridiculous thing I've ever heard, seen..." may hurt. But sometimes it's all you've got left if the arsenal of wittiness comes up short, or if the quick feet lose their footing.
Hey, we're all human. We're all bound to lose it now and again.