I think there's an underlying tone that because she is the sole authority on DD, it's been made that way through the actions of both OP and the paternal family, that she thinks she's got the same power over little DD. She hasn't. She's a 50% authority, as is DH.
There's a lot of she won't allow, and she'll divorce if they do this (like hell she will, she tried to call his bluff and that went well for her, but I can see the DH actually divorcing her down the line as this issue grows) with little concept that she's only got an equal say over little DD whilst in the marriage, and virtually zero say over how DH parents his sole daughter once that marriage ends. She's not going to prevent him providing for his daughter. She's not going to force him or his family to provide even more than they have been for her daughter. And she'll lose what they already do, as the only people who do anything for the DD overnight on divorce. Hence she's not divorcing him anytime soon.
She can't make this new family become the one she wishes her eldest DD had, not by tantrums, divorce threats, or refusing to engage with the actual paternal family to make it seem like "you're all she's got." She can make them another ex family if she carries on. And she can't stop them supporting little DD either way.
This has all been a massive reality check, I imagine. And she needs to accept the information she was told from the start, and make a decision whether she wants to actually accept they are doing nothing wrong by not treating an unrelated child the same as their own child and teach her daughters that you have different lives because I had you with different dads, or she can leave, return to just her parenting eldest DD, with little DD going between OP and DH. Those are her options.