Dear Miss Manners?

What do you do when you’re walking towards somebody you know and you see them and they see you, but there’s still so much distance between you? Especially if it’s someone that you don’t know very well or aren’t sure if you want to stop and talk to and don’t really know what their thoughts are on the subject, and if you wave hello from a distance, then do you just keep walking like the encounter has already ended, except to maybe say hello or nod again as they walk past? Because that thing that sometimes happens is just really really awkward–when you see someone and they see you but you pretend you don’t see each other and instead watch the ground or fiddle with your iPod until just before you pass when it’s okay to look up and say “Oh, hi!” like I’ve only just seen you there except that you haven’t and you both know it. Even with people you do know or were even supposed to meet, it’s weird because you see each other and then the interaction falls into limbo because you’re not really sure what to do in the interim. How long can you keep your headphones in? How close is talking range? Seriously, is there etiquette on this?