F.,
Are you a thousand percent certain she has never been alone with him, even for a few minutes? This sounds very suspicious, and there could be something that has happened to your daughter with this person that has traumatized her. I'm not saying sexual necessarily (though that is also a possibility), but he could have done something to frighten her when you were not looking.
Regardless, even if he has done nothing to her, do not attempt to minimize her feelings of fear toward him, even if doing so would spare you embarrassment. This is your daughter and she needs you to make her feel safe, no matter what her reasons are. You don't even have to tell this family friend the reason you are perhaps keeping them apart (if that's what she wants), just take her to a different room where she has no contact with him and don't tell him why.
When I was 7 my mother had a boyfriend I hardly knew, and I had the same reaction to him. He had never done anything to me, but the reason I felt this way was because he was trying to kiss me whenever he saw me..as a father might kiss his young child..but because in my eyes he was a stranger I was terrified of this, and it was all the more worse when my mother tried to minimize my feelings of fear toward this man since she didn't want him to be offended by my reaction so she made me sit with him. I never forgot it or got over it and looking back (I'm now 42), I view that experience as her putting other people's feelings ahead of my own childish ones. Not a good way to bond as mother and daughter.
Good luck.