I'm in agreement with talking to this woman. I know your inclination is to defend your GD, but sincerely try to hear the neighbor's take on the situation. You might take some flowers or cookies to her house, or invite her over for coffee (though she'll be more comfortable and relaxed talking to you on her own turf).
You might start by asking her to list her specific issues with your daughter (noise? littering? trespassing in her yard?) and let her know you will gladly work on those issues (if any) from your end so she won't be so bothered. There could be some specific behavior that is setting her off, and you might be able to help correct that. This part is very hard, but can be very productive, and get her to let go of some of her attitude.
While you're drawing her out, don't do ANYTHING to argue against her statements or defend your granddaughter. Do your best to summarize what you think you've heard from her, and ask her to correct you if you haven't quite "got it" yet.
Once you have heard her end of it, you can introduce your own concerns. If you can keep your requests at the level of feelings and needs, she'll be more likely to hear you. For example, "When I heard you yelling at my granddaughter while she was playing in the street, I was puzzled, anxious, and angry. My gd didn't appear to be doing anything offensive. She needs to have the same freedom other kids have to move around the neighborhood and have a good time, and I need to know she won't be misunderstood and yelled at."
Finally, make a request that's within her means to satisfy. Might be, "Next time you are upset that she's doing (offending behavior), will you please call me at this number _____, so I can come and help her understand the problem?" Or maybe, "Can you tell me what you understand about my concerns, so we'll be on the same page?" Or even, "Can you suggest to me what you'd do if you were in my position?"
Good luck. This sounds like a heart-wrenching and infuriating situation. If you'd like more suggestions, examples, and principles of the approach I've suggested above, google Non-Violent Communication. My husb and I both use these techniques to very good effect in difficult situations.