Iloveoreosxx - I am so sorry for your loss - I can only imagine the scale of your heartbreak. It is absolutely right that you do what you need to, to cope. In your situation, I can't imagine wanting any other baby to wear my baby's clothes - and if keeping them gives you even the smallest bit of comfort, then you should do it.
Even leaving your sad circumstances aside, though, it is never acceptable for someone to simply assume they can have another person's possessions! I handed on things that my dses had outgrown - but that was my choice to do so - if someone had TOLD me that she was going to be given them, she would not have a snowball's chance of getting so much as a single sock!
You mentioned Christmas dinner - does this mean that you are going to have to see her on Christmas day? If so - and if it is unavoidable - can you think of some strategies in advance, to deal with her attempts to start a row? Responses you could make if she tries to kick things off - "Now is not the time for this discussion, SIL", "No, not now, SIL", "I am not having this discussion with you now, SIL" - repeat on the broken record approach, in your calmest, most bored tone of voice - and if you can face the idea, change the subject. Deny her the chance to have the blazing row she wants!
I just wish I could put my arms round you, right now, and give you the biggest hug - my heart is breaking for you - such an unimaginable loss, and then having to cope with her insensitivity!