What do we do now? No contact, supervised visits only?
As always, you have choices.
1) You can let it slide, knowing this is who she is, and hope that it doesn't happen again.
2) You can go No Contact and never speak to her again.
3) You can choose Controlled Contact, be cordial, but non-emotional, as if she is an acquaintance.
4) You can communicate your support of her good recent behavior, address the situation that occurred regarding your step-son, and set a boundary for future interactions with your children.
What do you think is the best thing to do for all involved, including your aging, mentally ill mother?
This is a good place to work this through.