Twinkle, she sounds very much like my late grandmother and my parents (and by extension us children) did develop pretty effective strategies to deal with her. (Although they did also move like you!)
Accept that you're never going to be able to change her or her behaviour, that's not something that you can control. But what you can control is how you react. Behaviour like hers is designed to get a reaction, that's what she wants - so don't give it to her. Don't be drawn into arguments, don't allow her to upset you. Sit down with your DH and see if you can agree a limited amount of contact which is acceptable to you both. In the case of my family it was a visit every six months and a weekly phone call. Stick to those limits. That way you are prepared and know when it will be happening and then once it is over you know you won't have to worry for a set period of time rather than walking on eggshells not knowing when she will be sprung on you next.
Do not ever allow her to see that she has upset you. If she makes unpleasant comments ignore and firmly change the subject. Don't react. If she is at your house and becoming unbearable don't be afraid to decide it's 'nap time' and remove yourself and the children upstairs. Or decide the children are restless and need to go to the park. Don't make a big song and dance or point out of it which will show you're upset but firmly and assertively say this is what you're doing. If she demands you do things in a way she wants then politely thank her for her input but say you are happy with the the plans you've made. Don't be drawn into arguments. If she is nasty or ignores you just let it wash over you and remind yourself that she is doing/saying these things because of the way she is rather than because of any fault on her part. Don't worry about what she says to other people about you, they will know what she's like too and won't pay any attention.
Basically it boils down to not letting it bother you and refusing to engage with any tit for tat nastiness. It is hard at first, but in the long run it makes things much easier because if she's not getting the reaction she wants then she will be less inclined to try and get it. She'll be getting a great deal of satisfaction from causing a big row, upsetting you and knowing she's caused discord between you and DH so don't give her that satisfaction.
At all times in front of her you should be calm, serene and polite but also firm and assertive without rudeness, arguing or shouting which you mustn't allow her to draw you into.
A final point. She has mental health issues and it must have been traumatic for your DH to grow up with that. And your primary concern here should really be supporting DH with the fallout of her MH problems as it's not easy to cope with a relative with these issues. But also when she is being dreadful do try and remember that as she has MH issues it's not entirely her fault, although I appreciate that's difficult to do when someone's being very nasty. But keeping that st the forefront of your mind may help you to stay calm and not rise to her bad behaviour.
She can only bother you if you let her. Let it wash over you and let it go.