Apologies for my silence yesterday. Partly my internet was on the blink, partly I have found this thread very intense and needed a break. Probably a textbook daughter of a narc thing to do 
Thank you to everyone who has contributed especially those who have shared their own very difficult family situations
. I hope I haven't reopened any old wounds.
I think perhaps though from my OP it seemed like this was having a bigger impact on our lives than it really is. DH, DDs and I are together every day and like all families have a million things going on. I see my parents perhaps for 2 days once every 2 or 3 months, then maybe the odd longer spell once a year, and have a phone call once a week/fortnight (which obvs doesn't affect DH and DDs). Of our holiday time, perhaps 20% is spent with my parents, 20% DH's family, 60% us alone - we are pretty antisocial! It was top of mind after I had just spent the weekend with them but really, they don't have that much effect on our lives. People seem to think I am putting DM before DH, DH would honestly laugh himself silly at that suggestion! Because he knows me better than anyone.
As some have said, others may be projecting their own very toxic situations here. I do appreciate all the advice, I really do, but honestly this is not making DH and I unhappy. We are not avoiding the issue, more that we have about a dozen other issues that come higher up the giving a shit list!
I've been a bit shocked by a couple of the recurring themes in some of the posts - one is how quick some people are to say go NC, you can never have a relationship with a narc. There are shades of narc, NC is a big thing, and it's hard to make a judgment call when you know nothing about the situation. Though I recognise there have been some more balanced opinions so thank you for those!
The other is the "your DM, your problem" attitude, and the suggestions if the "boot was on the other foot" I would expect DH to do the fighting. The boot has been on the other foot, I had a big falling out with MIL, and dealt with it myself. DH wasn't going to touch that with a bargepole and I didn't expect him to! It was my battle. Perhaps this is colouring my view of expecting him to fight his own battle with my DM rather than expect me to do it. I have fought many battles with DM over the years, I hardly shy away from it. I'm just of the opinion that grownups talk to each other directly, not "so-and-so thinks this about you" like in a playground. So the accusations that I "don't have his back" are just silly. DH knows very well that I support him on everything, and suggestions that my DM may come between us or ruin our marriage are just way off the mark.
Of course, the issue with the DCs is different, that IS my battle. If she keeps showing favourites, I'm going to make it very clear that's not acceptable. She herself, being a non-favoured child, should know how damaging that is. I can't remember if I said this already, but I think she thinks I favour DD2, so she's trying in a warped (maybe even unconscious) way to redress the balance, doesn't excuse it though. I like the way some PPs have put rules in place, going to have a think about that and exactly what the boundaries are.
DH and I have agreed that we are going to limit the amount of time we spend with them, read up on grey rock and employ it wherever possible (thanks to those who suggested it), and he can go off and do other things if they visit. I have accepted that we can't go on holiday with them again, and also can't leave the DDs with them. It's a shame, but also not a huge loss.
If they do come on father's day, DH will go out for the day. And before anyone feels desperately sorry for him, that is his ideal father's day and one he has been lobbying for for years
. We'd do a family lunch with the DDs the day before, but that's more for the DDs sake than DH. Neither of us really go big on "events", we don't even bother with anniversaries etc. DPs may not even come anyway, and I haven't been pushing them.
Oh and to those who said I should have called her on it when they were arguing/she made rude comments. If you have ever spent time with a narc you will know there is NO POINT. I called her on everything ridiculous she said for the first 30 years of my life, and it was only me that got hurt. She digs her heels in more and it makes it worse! Zero point. But having dwelled on it, there is no point DH saying anything to her either. The drama would reveberate around the family for years, and it's just not worth it. Grey rock, all the way...