A.S.
Hey A.,
I have never had the unpleasent neighbor but I have delt with some very nasty people on a regular basis. It sounds like you have done just about everything you can do as far as talking to her to try and mend the relationship. I would just ignore her, totally cut her off, don't smile, wave, whatever just act like she does not live there. If you really want to send a signal or keep her from seeing your son, put up a privacy fence on that side of the lot. If your son asks about her, he is old enough to understand some people just are not nice.
Sorry if I sound terrible, but honestly you need to live your life and cut the bad ju-ju out of it. You don't deserve a crazy neighbor.
Also I don't think that it is wrong that you feel she should not work with your son at school if that opportunity arose, heck no. Each year I would double check and make sure she would not be around him. If she changed like this so fast with you, lord only knows what she could tell your son. It all boils down to, some people are just strange!!