What self-respect are you shredding in this case?
I think you should be willing to make the argument and challenge him on his beliefs as a racist, if you honestly believe he's a racist. If you're standing up for what you believe intellectually and making the argument, what respect have you shredded? I don't get it! Sometimes you got it make it several times with some folks for it just to soak in.
I can assure you that Martin Luther King did exactly that. He was constantly meeting with his political opponents to enlighten them in regards to a racist south. Even though he was assassinated, his argument eventually prevailed.
If she's some kind of Nazi or KKK clansman, yeah sure I'd walk away, but I don't get that feeling in regards to the OP. They were originally friends for some reason!
Believe it or not, some people can be won over by a good argument!
When you cut people out completely in regards to this friend, you're failing to enlighten those very people who tend to be the obstacle to your goal. I see it as standing up for yourself, not running from it!