There are different levels of response. I guess flat out honest works only if you 1)wish a friendly solution (by preventing possible embarrassment or argument), and 2)believe the other person is capable of understanding. I might do what Jon said, and say something publicly if I got the feeling others might have the same wrong assumption. Peter's method would work to get people question reality as they saw it. It won't just correct the current situation, but possibly will get them to think a bit in future.

It helps if you see it as not a big deal. Folk often assume I have Irish ancestry, because I play Irish fiddle tunes, have red hair and a light complexion. Them: "Oh, I'll bet you wanted to get in touch with ancestral roots." Me: "Nope. No Irish ancestors at all." Easy and simple. Of course, if a lot of people kept saying similar things, I'd probably have the explanation put on a T-shirt.