I would absolutely restrict communication especially since it sounds like she might teach your daughter these disrespectful and hurtful views towards your DH.
I'm so sorry you're dealing with this. I would probably reply with "but apparently I was raised to insult and demean a member of my family, and consider myself superior in all things. One of us should be ashamed, but it isn't me."
The thing is, as special as a grandparent relationship is, there is no relationship more important than the one children have with their parents. This is your DD's father, and it is much more vital that she not be put around people who would talk negatively about him.
I would take the stance you have - until your mother can act like a respectful and mature adult, and treat her son-in-law and the father of her grandchild with kindness, she is not allowed to see her granddaughter.
Re: I need some unbiased perspective (NTR and loooongish)
This
This. Totally.