zephyrcat - I would just walk away, I know its hard, but the kids will get over it.
My mother fell out with me when DS was 9 months old, over my older bro, he got married and said no kids, fine, but then my nephew(6) and niece(12) were invited, but not my son(2), she didnt want to invite her sisters baby, duh. Anyway I refused to call her after she told me I was selfish to miss my bro's wedding, I had no kids at my wedding, 4 yrs b4, but I invted my family (kids included) it was just friends kids that werent, and Neph & niec were the only ones at the time. (also other family members got involved un-necessarily)
I had decided as DS didnt really know her that I wasnt gonna try, as it would be too painful every time she fell out with me, DS would suffer.
Long story short, she missed out on 9 months of my DS growing up, (his first birthday for one thing), only afta DH had a crisis and left me, did my younger bro tell her to speak to me as I needed family around, and that she had already missed sooo much.
After about 2 months og seeing her, she admitted to my sister that she found out the "other family members" had stirred things and blown things out of proportion. (Didnt admit it to me)
Now she will not fall out with me as she misses DS too much and cant wait for Bump to come along in 3 weeks. Also doesnt listen to the Family members anymore. Thankfully