Messenger of God said, ‘The person who (lies) in order to conciliate between people is not a liar, when he conveys good or says (something) good”.
[Al-Bukhari and Muslim].
The narration in Muslim added: She said, “I never heard him (she meant the Prophet (p)) giving permission of lying in anything except in three (things): war, conciliating between people and the conversation of man with his wife and the conversation of a woman with her husband”. (Riyad as-Salihin Book 1, Hadith 249)
It is claimed by critics that the above Hadith endorses Muslims to lie to disbelievers with impunity. This claim is false. Are those who make such claims ‘blind’, can’t they read the text as it is? Where does it say anywhere in the above Hadith that one is allowed to ‘lie to disbelievers’?
Before proceeding further on the above Hadith, viewers should bear in mind that lying in Islam is forbidden with regard to everything except by extreme necessity.
With that said, let us turn to the Hadith. The first part of the Hadith, ‘deceit in war’, is dealt with a lot of detail in the following link.
The second part of the Hadith states that two friends have disputes in a conversation and it may lead to feud (or bloodshed). The Hadith states that if a person lies in order to reconcile between them, there is nothing in wrong with it.
The last part of the Hadith speaks about lying between a wife and a husband. Example: your wife might ask is her cooking is good and if it tastes good. Even if does not, you might say it does taste good to avoid breaking her heart. Another example: your wife’s beauty might have faded as she ages, she might ask her husband if she look beautiful – even if she is not as physically attractive compared to the beginning of his marriage, the husband in such a situation may say that she is the most beautiful woman on earth. Hence, I see no problem in such circumstances, nor do I see this as a sin.
Dr. Muhammad Ali al-Hashimi comments on the ‘friends’ part. He writes,
“Islam also commends the Muslims, men and women, to reconcile between two parties … Therefore the Muslim woman is required to reconcile between her disputing sisters, following the guidance of Islam. Islam has permitted women to add words for the purpose of bringing disputing parties together and softening stony hearts. Such comments are not considered to be the kinds of lies that are haram (prohibited), and the one who says them is not regarded as a liar or a sinner. …” 
Islamic Scholar Imam Nawawi also comments and writes:
This hadith tells us a very important principle, that is, in spite of its being unlawful, one is permitted to tell a lie if one has to do it for reforming one’s society or family or in the interest of Muslims in general. If two Muslim brothers are estranged and someone communicates to them such things which are likely to remove conflict and rancour between them, promote mutual love and bring them nearer to each other, such action, even if it has a lie, is not called a lie in Islam.
1. In order to keep the enemy unaware of the true position, it is permissible to make false propaganda as it is an indispensable device for winning war.
2. In order to maintain pleasant atmosphere in family life and for this purpose telling a lie becomes inevitable. Shari’ah has permitted lying on such occasions. 
Sheikh Muhammed Salih Al-Munajjid
Regarding lying, it is highly forbidden, and is of varying degrees of abhorrence and sin.
The basic rule with regard to lying is that it is not permitted, but there are certain circumstances in which Islam permits lying to serve a greater purpose or to prevent harm.
One of these situations is when a person mediates between two disputing parties in order to reconcile between the,. If reconciliation cannot be achieved in any other way.
Another example is a man’s speaking to his wife, or a woman speaking to her husband, with regard to matters that will strengthen the ties of love between them, even if that is accompanied by exaggeration. … One of the most important forms of both being truthful and lying is in the area of promises and covenants. Being truthful in promises and covenants is one of the characteristics by which the believers are known. Both promises and covenants involve saying something about an issue to confirm that you will do it, especially with regard to one’s duties towards Allaah. … 
The claim by critics that somehow Muslims are allowed to deceive non-believers to ‘take advantage’ is an outright lie which has no bases from Islamic scripture as we have seen. Those who cling to such ideas that Muslims are allowed to deceive disbelievers, no evidence for it exists in any authentic report. It is only propped from their disillusioned minds, so to spread hate.
 The ideal Muslimah: The True Islamic Personality of the Muslim Woman By Dr. Muhammad Ali al-Hashimi, page 242
 Riyad Us-Saliheen – The Paradise Of the Pious By Imam Abu Zakaruya Yahya Bin Sharaf An-Nawawi chapter 31: number 249
 Islamqa.Info – Sheikh Muhammed Salih Al-Munajjid