I grew up in a house with two smoking parents, and used to stink all the time (although I wasn't really aware of it until I reached secondary school and my peers mentioned it). I suffered with glue ear but, surprisingly, nothing else.
Of course, that was the 80s/90s and times have moved on - people know better.
I have never smoked, and notice the smell and poor air quality more than ever when I visit my dad's house now (my mum's isn't so bad as she smokes just one or two roll-ups per day and does so outside).
I do not think YABU at all by refusing to take your children to her house. She is of course welcome to smoke in her own house as much as she wants, but she must learn to accept that others may find the environment unpleasant to be in.
Of course, she will probably not understand this herself because:
a) as a smoker, she cannot smell it herself and probably vastly underestimates just how bad it is in there;
and
b) she may well be of the same stock as my father, who used to smoke at his desk at work before it was banned and brought up his kids in a smoking household, when it was socially acceptable and wasn't such a big deal - and he's barely moved on 20-30 years later.
Just stick to your guns. She may come round in time. My father is a stubborn smoker but even he has recently started smoking at his front door after a lifetime of smoking indoors.