Is it considered unprofessional to use contractions (doesn't instead of does not) in UI. Should I avoid contractions completely or are some ok and some not?
It depends on your target audience and the voice you are using. You can be quite professional and yet use an informal voice. Check out http://balsamiq.com/ for an example (great tool, BTW).
Contractions are part of informal communication. If you need to remain formal, then do not use them. Also understand that a seemingly easily missed contraction can change the meaning of a sentence. In that case, you shouldn't use them. Finally, if you are writing for an international audience (that uses English), it is probably a good idea to avoid them.
In all other cases, they work well.