With have the same issue with my Mum and her dog who is a Border Collie and very attached to my Mum. We made it clear our kids are never to be in the same room as our kids and there was a lot of huffing and comments about us overreacting, but we just stuck to our guns on the issue. My Mum felt challenged by the fact that she was no longer making the parenting decisions in my life, it was now MY turn.

I have dogs and love dogs but it's a no brainer. If you don't want your kids around a dog who has effectively attacked another dog that is your right and responsibility. If you don't stand up for what you want for your kids, no one else will do it for you. You know the right answer (the one that feels right for YOU and YOUR kids) and whilst it's highly unlikely the dog will do anything to your kids, the risk isn't worth it given the history of the dog. You don't want to end of being right about this situation being wrong.