Good God, why are you asking what to do and then picking to ignore the main answer, that sorts it all out quickly?
You aren't 'cancelling' your friend and daughter coming round for a sleepover. You're just 'correcting' the idiot woman who changed the plan.
You tell her immediately that you never invited her daughter for a sleepover and as it's rude that the woman used her daughter to catch you out, it's up to her to tell her daughter there isn't a sleepover.
Tough if she doesn't like it. Say that politely and then judge her on her reaction. If the whole night is cancelled-that's on her.
Don't lie, don't embellish and DON'T say anything about the girls' level of friendship!
At the end of the day, you invited an adult over and she's taken the piss by dropping you in it for a sleepover.
This is not the little girl, it's the mum.
Do it properly and there won't be 'future situations' as your friend is a rude adult.
"As other posters have said, there's no reason to believe that things won't change and this girl may start treating my kids better and may become a close friend of DD's."
"I really don't want to be honest at this stage and I don't think she'll take kindly to me saying it's adults only after me agreeing to it when I was put on the spot."
-this though, is not saying something unnecessary that is negative sounding. It's not a daughter issue, it's a rude mum inviting others over-even if it were another adult. If she can't make it, she should say sorry she can't and not force you to take everybody in.
"Her DD was so excited about it and it just seems harsh now to say she's not allowed to come but her mum is."
-Really? That's her mum who caused this upset. Her mum will be telling her that she 'can't come' or if she's honest, that there isn't a sleepover to go to and never was.
And most 4 year olds aren't invited to drink wine, so that's why her mum is invited-as the only apparent adult.
"I also know her DD can be a nightmare for going to bed so she may still be awake when my friend would have to leave to come to my house, which would definitely cause a drama. It feels as though on this occasion I need to exaggerate the bad cold etc and then be very clear in future about it being adults only. Another point is that my DH works away so I'm on my own with my 2 kids and I've got the cold, so in all honesty, cancelling the plans would probably do me the world of good."
-This is the other mum's parenting issue and shouldn't be put on you. Just like you wouldn't put it on others if you were invited out.
Would you be so rude if the roles were reversed?
The mum does not come off well, and maybe that's why you find yourself wishing to distance the kids...? Because she's causing it by her behaviour and what she allows/puts them up to?
You have pretty much been guilted into starting this thread. By the MUM.
Tell her to come alone for the adult evening, as she was invited on her own, or not make it and you can rearrange...
Leave the mess she's caused for her to clean up.
Do it now, as it's polite notice for Saturday, isn't a lie, and handles the problem. She shouldn't do it again in future.