Big hugs, what a horrible situation for you to be in.
My mum is not exactly the same as yours, but has her own huge array of issues, including (functional, as much as it ever can be) alcoholism, pathological lying and what I suspect is a personality disorder of some sort (like histrionic personality disorder).
I used to find myself going between enabling her behaviour because to do otherwise would be to bring a huge sh*t storm down on me, or getting jack of her behaviour and standing up for myself and then enduring said sh*t storm until I gave in.
My husband gave me some great advice. I can either accept her as she is with these limitations, and ensure that I protect myself and my boundaries during any interactions with her, or I can refuse to accept her as she is because of the ongoing impact it has on me, and cut off contact with her because of this. It's the going between the two that causes the issues - fighting between your sense of right and justice and wanting to keep the peace.
It sounds like that might be harder for you to do given that she provides financial and child care support, but I guess the question is, is this support enough to make you accept her behaviour and that she will likely never change? And are there some boundaries you can put up to protect yourself while interacting with her (and will she respect these?).
Or, alternatively, do you need to accept within yourself that you can't continue to accept her behaviour, and therefore will need to cut off that support and possibly contact (at least in the short term) so you can protect yourself and your family.
Only you can decide what is right for you and your family, and it might be good to discuss it with your counsellor.
For what it's worth, I haven't cut my mum off because I do still love her. However I have set some very strict boundaries within myself about my interactions with her and if she crosses the line, I back right off and protect myself first.
The last thing I would say is to think about your child/children. They will see her behaviour and how you respond to it. That really helped me solidify how I wanted to interact with her. It also made me realise that I would never treat my own kids the way she treats me (it sort of validated that she really wasn't doing the right thing as a mum, you know?).
Good luck lovely.