I think you should think about breaking your current pattern of activities, and try to meet new people.
There is no chance that you will manage to have a relationship with this friend without raising some serious problem among your friends,... Also, don't forget that unattainable love is particularly seductive, and it's easy to be infatuated with something which is out of reach.
I think it's good that you realized your feelings, and it's not something to be shamefull about. Also, I don't think reducing exposure is necessarily a good option (if it's only because of these feelings), since you will idealize your friend even more. You just need to meet new people.