Assalaamu Alaykum wR wB.

When interacting with the opposite gender, I understand we need to lower our gaze. Does this mean we should look downward and avoid eye contact?

Women, even practicing Muslim women are typically uncomfortable if I do that. Also, where is the line between permissible and impermissible interaction? Is it okay to make small talk? How about smiling, laughing or telling jokes? Are the rules more relaxed if there is a great age difference?

I feel purer if I speak more formally and controlled but I make women feel uncomfortable and tense if I do that. Please advise me as I want to do what is right and I am confused by the great range of scholarly opinions out there on this matter.

Looking at the opposite gender is permissible as long as there is no lust (shahwah) or temptation (fitnah) involved. Looking at the opposite gender during buying and selling, education, etc. is acceptable. Allaah has ordered us to avert "of our gaze", and this indicates that some forms of looking are permissible while others are not. 

The Muslim male should always remember that one of the greatest fears that the Prophet (s) feared for men was female temptation. You should avoid behaving in a loose manner, looking without reserve, etc. as it is sometimes difficult to tell what may cause fitnah.