I feel your pain. My neighbor is a complete whack job. While I understand everyone's advice on being honest with her, the only problem there is if she can't take subtle, she won't get honesty. You can't reason with crazy people no matter how quiet or LOUD you talk to them. Trust me, I'm an expert in this situation.
See, my problem is the other way, I'm the loudmouth and my DH is the one who lets people walk all over him, hence the reason we don't speak to our neighbors anymore. He let her get away with everything to the point that she just starting coming over with no invitation. I kept telling him to draw the line and he wouldn't even though she annoyed the crap out of him too. So I ended up losing my patience and said a few choice words and ended up having to call the police on her for harrassing us. Haven't talked to them since. It's been complete heaven for us.
Eventually you have to figure out if your sanity is more important than hurting your neighbors feelings, which I don't think she has feelings since she's cheating on her hero husband whose over there fighting for our freedom. You can't feel sorry for someone who has no conscience. Feel bad for the ones she hurting, not her. She knows the choices she's making and it's not your responsibility to care for her child.
It doesn't sound like you want to be this womans friend and neither would I. IF you were
her friend and she started this cheating crap, would you still be her friend? I sure wouldn't. That shows her true character. Which she apparently is lacking beyond words. If you can get your husband to speak to her then do it and have him make it as clear as he possibly can that you will not be taking care of her child - ever. And the neat thing about that is you don't have to give her a reason why!! Good luck.