JMG I think it's very difficult for you, and it is a shame that you don't get more support from your children's grandma.
I agree that some of the things she has said are pretty unacceptable. As a child I would find the idea that she could hear me, even when not there absolutely petrifying, was it supposed to be a joke?
OTOH, most of us have these generational differences with our parents/in-laws (there are plenty of threads about it), it is one of the dynamics of family relationships. And I don't think my mother knows who I am now, hasn't since I was about 16.
Just as you have lost your partner, and your children their mother, she has lost her daughter, which must be just as hard a cross to bear. I'm sure she does feel left out, and wants to try and keep her daughter's memory in the children's mind, she may just be very clumsy about it.
As you say, she is the only relative they have (except of course you). I know you want to protect them from more hurt, God knows you've all been thru enough, but is cutting their contact with her altogether really the right thing to do?
Maybe you could let them see her WITH YOU, less often than now. Try to talk to her about how you feel, I know it's hard, and frustrating, but I do think uprooting your kids from everything they know is drastic, given what has already happened to you all.
I don't honestly think she sounds dangerous BTW, but is probably out of her depth (as she was about the rape).
Love to you and your children