I remember the midwife having pamphlets and brochure about the effects of secondhand smoke on baby. I would perhaps arm yourself with these and give them to your MIL and tell her that you just don't feel comfortable unless she can follow your guidlines (ie, changing clothes and washing hand etc).
The big thing is you need to get you DH on side with this issue, so you can provide a united front. It is his mum, so he needs to bear the responsibility of handling her, so to speak.

Good luck.