Recently, I watched a student attempt--futilely--to communicate with his CFI about a problem he was having. Instead of looking directly at his student, the CFI's head kept bobbing around as if his cranium contained an enormous Mexican jumping bean. Instead of "I see," it was "eye doesn't see." The student's frustration was obvious. The CFI gave no indication that he was really paying attention to the student or his problem.
If you feel uncomfortable about looking directly at someone during conversation, then look at the bridge of his or her nose. Now, unless this is a suspension bridge (meaning that they have a very large nose), it will appear that you are looking directly at the person. This is known as bridging the gap.
On the other hand, if you are uncomfortable just listening and would like to chat just to break the pace, then interrupt your student and summarize what he or she has just said. Try saying, "OK, so what you're saying is...." In fact, stopping your student and summarizing what you think he or she has just said is one of the few times it's actually appropriate to interrupt. This technique shows the student that either you understand what is being said, or that you're misunderstanding it.
Being a good communicator requires practice. It is, however, an essential skill for all flight instructors. A CFI with good communication skills is sure to make a powerful and positive impression on his or her student. On the other hand, few things will cause a CFI to lose credibility faster than the inability to listen carefully when students talk.