I'm sorry to hear you're still having problems, and I hope you get some answers about what's causing the pain soon.
I don't know that an activity can cause arthritis, but I do know that repeated motions can bring on tendonitis and carpal tunnel and other problems. Let's hope that whatever's going on can be treated swiftly and that you'll be back to knitting again in no time.
And, NO, a mother can't have too many baby blankets. Usually at least one of the blankets is dirty and/or being washed when it's most needed, so I'd still give it to your friend whenever you can.