Just want to say a big thanks to everyone who helped me out with this. I've sent her a message telling her we don't wish to continue the friendship and outlining the reason why. I've let DH know and he said when he receives a message from her husband he will respond by letting him know that he is also unhappy about the comments made to me by his wife and we decided together it would be best to end the friendship.
I'm sure there will be fallout from both of them, but I'm sure telling her straight was the best way to go. She actually sent me a message this morning asking if there was a problem, so I had to respond to her direct question. My only two options were to lie and say there was no problem, or tell her there was. I wasn't willing to do the first, as that didn't seem right.