First I will say my heart goes out to you! Second, I don't have an answer but I will share with you...
My husband and I have been married for 23 yrs this coming February, he married me and 4 year old twins (boy,girl). I have said he treated me better while the children were there than while they would be away visiting their dad's family on the weekends. That is another story - I tell you this to share... that his mom has 10 grandchildren, three of which are step-grandchildren and has done a wonderful job at inclusion. In fact I have seen where she treats the three better than the natural grandchildren that don't visit as often, even so she does play favorites. I say this to also say my twins are now 27, my daughter lives with a guy that has two other children - she also has an eight year old daughter. I struggle with accepting the relationship (not married), but I have found that the natural feelings/bond I have with my natural granddaughter are so much more than with his daughter that I have known since she was four, now 10. I struggle with these feelings, and try to be considerate, but it isn't easy - little things she does grates on my nerves, and I see my granddaughter picking up some of her annoying traits/habits. That makes me feel bad, but I don't seem to be able to not have these feelings. She is a sweet child, and undeserving of my lack of attention, positive or negative? I do try to include her. I just want you to know that some people are naturally compassionate and accepting of other children, and others like me have to really work at it - and sometimes little things like not letting the other child have an apple are moments of thoughtlessness that arises without the time to process the repercussions of what statement our actions are revealing... intentional and/or unintentional?
So, in this I suggest a little more understanding, but also don't feel that it is a bad idea to approach your mother-in-law and point out in a nice way (away from the children)that maybe she should have handled it a different way to be more considerate of the feelings of your older daughter.
I had a step grandmother at birth and looked at her and was treated by her as an oldest grandchild, when I 22 her oldest natural born son (4yrs old than I) had his first son, her first natural grandson. Even though she was there when I was born, I noticed she showed favoritism to the two boys in ways - for example in the display of their pictures, attending school and ball activities, etc. Being 23, you would think I would be more understanding - at no time did she treat me ugly or mean - but these ations spoke loudly still... the boys mother I feel unintentionally helped this separateness - I loved my Ma Ma and Pa Pa and was the only other grandchld that took the time to visit them rather than the two boys. I know I was special to them because of those visits, but it didn't keep my mom and her sister and their families from being treated like step children at my Ma Ma's funeral in April, and even my Pa Pa's funeral in November. Because of my uncle (sweet as he is)and his wife still viewed himself as first child with three older 1/2 sisters?
My advice is to share with your daughter the meaning of a step parent - someone that has to make a choice to love, rather than the special bond that comes from loving your natural born child, and then the child born from that child is even greater. It is the difference between making a choice to love, and then a love that is already there. Your mother-in-law didn't marry you, her son did. She has choices to make on how to love you and your child - that love has to grow with time. The bigger person chooses to love in all ways, to some that comes through a compassionate nature, unfortunately we all do not have that same nature.
Good luck - It was revealed to me when my grandchild was born and the all consuming love that I felt and wanted to share with someone - the only other person that could have possibly felt that way would have been the natural grandfather. My husband loves her, but there isn't that same unconditional love. I believe God's intentions for marriage/family is not revealed through failed marriages. Even though as always the Lord allows good to come from our failures in most cases - it still isn't His true desire for us. But, we have to make the most of it...
Sorry for the long response... hope this helps in some way... try to have a little patience - I'm sure the love will grow - 10 year olds can be the beginning of a hard stage with attitude. I find 10-12 year olds are adjusting to not being little girls, just before everything else starts happening - hang in there.
M.
Mother of 4, MiMi of 8 yr old granddaughter and one on the way.