Several years ago I was almost done with a landscape design when the client sent me an angry email that I was taking too long (I wasn't, time to completion is in the contract) and they wanted their money back. I have a termination clause that if you cancel the job after I've begun work, I may retain the deposit ($500 in this case). I called my brother to get his thoughts, because in this age of Angies List, Yelp, etc. I was concerned that they'd badmouth me if I kept the deposit. His response? "People like this, if they're going to badmouth you they're going to do it whether you retain the deposit or not. At least get something for your time."
I think you're in a similar place here. She's holding you hostage with WORK THAT DOES NOT YET EXIST. Think about that for a second. These folks could move in and already have someone they want to use, or have a glowing referral from someone in their office.
It needs to stop. However, I wouldn't immediately hit her with a lawyer over slander, etc. You've tried your best, and with a little help from your client she'll simmer down quickly and turn her attention to someone else. If you go on the offensive I guarantee she'll be happy to go to war.