What am I supposed to do with her?

Reading through all of this, I'd say get the hell out of there as fast as you can, even if it does mean going to section 8 housing and leaving your MIL to figure out what to do on her own. She's made it clear that you are her special nemesis, for no other reason than she's just the kind of person who feels the need to be at war. She justifies herself with the excuse that it's her grandchild, but knowing that she accused you of an affair and intentionally disrespects you....I mean, your child sees that, you know? Your child is learning every day that Granny gets to be mean because she's right, Mommy deserves it because Mommy is bad. She's learning things no small child should be learning. She's learning to be a bully and to dominate others through disrespectful behavior. And very soon she'll learn that she can always get whatever she wants if she plays just the right angle and uses people against each other. Therefore, the rules do not apply to her. This is a disastrous development in a child's psyche that could cause her all kinds of hardship down the road. You've done all you can to try and be reasonable, but you must act to remove your child from this kind of atmosphere as fast as possible.
Also, in the meantime, why isn't your husband standing up to his mother on your behalf? Not that him doing so will make her any less your enemy, quite the opposite, but sometimes a man has to stand up and let someone know that the very next time his wife tells him that she overheard this woman spreading hateful rumors about you, then he will personally call every relative she shared that foulness with and organize some sort of family intervention to get her to quit this destructive nonsense. He needs to let his mother know that the very next time his wife tells him that Granny undermined her in front of your daughter, it will be the last time for quite a while before Granny gets the opportunity to see her grandchild again. If she insists on going to war with you, then your husband is in the very sad, but necessary position of picking a side. Possibly having a male put his foot down will have an effect, if she's that sort of woman. Even then, it'll make her hate you more than ever.Best of luck, it's obvious you're trying and that this isn't your fault. I know all too well that there's nothing more awful to deal with than a hateful mother in law.

If living separately is not an option you must try speaking differently with her. What you are constantly doing is making her wrong with the words you use. Nobody wants to be told they are doing wrong. It makes them angry and what I can sense she's been annoying you on purpose here. We all have a child living inside of us. Take a different approach. She is the child's grandmother and wants to be involved, wants to take an important part in the child's upbringing. You want her to respect you but you don't respect her. Because you two being so much all about yourselves, holding on onto your own truth the whole atmosphere feels tense. You must improve your relationship with her. Talk with her differently, see her viewpoint and perspective as well. Talk about how you feel, how you respect her and want her help and that you have boundaries that are really important for you and you want her help to not cross them, listen what she has got to say, what she thinks and feels and thank her. Try to find a compromise. See if you can get mutual agreements and boundaries, and I'm sure you can.The very best of luck

have you looked into low income housing? and applying for state benefits? granted its not the hottest thing in the world but it can get you out of there faster. 2-3 YEARS is a long time to live with someone who basically undermines you. and young children re very susceptible and are liable to pick up on everything. good and bad.

I had a similar problem. I had daughter when I was 19. they helped me all threw out the pregnancy and since I was a single mom they helped me until I met my husband. he moved in with "us" . and they felt like they should raise her not me. and once my husband came into the picture they would over step there boundaries. honeslty it didn't get any better until we left. we actually ended up getting into a huge argument and didn't speak for like 2 years.bc of this. because they didn't want to understand that she was my kid and I had certain rules...they wanted to basically let her do whatever. my husbands the one who put his foot down. and forcefully told them the deal. it eventually took.and now whenever the kids are with them they will say ask your mom.or ask your dad.or will give us that look like is this ok first before anything...but it took my husband basically flipping shit on them or them to get it. im not saying do that...but you NEED to get her to understand..your kid your rules. she probally thinking oh I raised kids. blah blah blah.

Thank you both of you.
Mrz.B - She never raised her son. He and his late father told me his father raised him. She's also admitted it, since she made more money. I helped with a cousin of mine when I was a child, and it's sad when someone, who's never had a child before, knows how to fix a bottle, and check the temp of it before giving it to a child vs. someone who's had a kid. I've learned that if you want a child safe and sound, you don't leave with this woman.
Heartsconnected, I see where you're going with this, but we have not been on good terms since I moved in, about 5 or 6 years ago. Point frankly, she didn't want me here, or with her son. I have no problems with giving someone respect, however, I do believe it needs to be earned. And, she hasn't earned it the whole time I've been here. I've tried to respect her, I really have. But it's seems like she resents me more than wants to have me around. Back when I first found out I was pregnant, we had just kicked a, now ex, friend out due to them not upholding their end of the bargain for staying here, and because we had the tv with the game systems in our room, he spent all his waking hours in our room, playing video games. But, she accused me of having an affair with him, but instead of asking me, directly, she asked him and my husband, completely avoided asking me, and if I ask her about it, she denies she ever asked either. But, the whole time I was pregnant if she was on the phone with her family or friends, she'd say the baby wasn't her son's, and that I'd slept around, all of which, hubby was conveniently at work.Hubby and I are talking about getting out of the debt we're in, then finding our own place, which I politely informed her I didn't want to spend my whole life with her, and so, she was free to a 1 bed, 1 bath down the road from us, but preferably not with us. Purely as a stand that it would be cheaper that way. So, we're thinking in about 2-3 years, we'll be able to move out, and get our own place. Which I have no doubts will fix our problem

I honestly don't think the situation will improve until you move out since you're living under her roof.