That's pretty tacky. If I were you, I wouldn't even give her a hint of where you got your pattern. In fact, I'd probably say something like, "Since you're smart enough to try to undermine my attempts to make money, then I'm sure you're smart enough to figure it out yourself."
Then let her supply everyone with freebies until she gets sick of paying for everything. Eventually this is going to bite her in the butt, so be patient. Oh, and if you can avoid talking about your for-sale knit items in front of this woman, I would do so! If she's around and someone asks you about it, just tell them you'll talk to them about it later.
Those who appreciate the work you put into it won't mind paying you!