If your husband has developed feelings for her you may need to end the friendship sorry.
Sounds very similar to a situation we had with my best friend years ago, they became good friends which developed into DH having a crush on her (he denied it but I knew) and even though she wasn't "encouraging" it the fact she never a) told him to back off and b) stop texting my DH led to him thinking he was in with a shot. He attempted to leave me for her (he was rejected lol!). This whole situation could of been avoided if she was a true friend to me and just stopped being overly friendly to him.
Needless to say we sorted it out and my best friend is now an ex and no longer in the picture.
ETA- Sorry just reread your OP and realised it's his friend. Still it doesn't matter- she needs to be cut off from your lives. She's not "encouraging" it but she's not telling him to back off either. It's time for her to go so you can work on your own relationship.
Good luck OP xx