Most of you guys are missing the fact that he said she IS NOT FAT AT ALL.
2 possibilities...
She doesn't really think she's fat and is just fishing for a compliment (as Porky said, the irony of his name not withstanding, ha ha). If you know this is the case, then a C&F joke about her being chubby is good, but you should finish it with something compliment-like (such as, "c'mon you know you look good so don't front") which both calls her on her BS compliment-fishing without being a **** but also gives her the compliment she was fishing for.
(BTW, when did it become AFC to compliment a girl on her looks?? I'm more likely to pay attention to, etc a guy who tells me he likes how I look than one who doesn't. If a guy isn't attracted to me for whatever reason, I'm not going to try to make myself look better so he'll like me, I'm going to say "ok, next" If you don't like what you see, then you don't have to look at me. I know attraction is subjective, one man's meat is another man's poison, yes pun intended.)
The other possibility is that she DOES really think she's fat. And since you say she is not fat at all and really hot.... then you have to wonder about her self-esteem and body image. It's not your job to reassure women of their beauty if they're too blind to see it, but making a cruel joke is definitely not cool. She may have a seriously distorted body image and even have an eating disorder of some sort. While you can't "save her" or "cure her"... you don't want to contribute to that either.
