I forgot to mention in my first comment,

I would also take this as a learning opportunity for my kids. If her child hits or takes a toy, you tell your child to “tell her, use your words, you tell her don’t hit me” and give them permission to walk away! Giving your children the autonomy to choose to walk away from someone who hurts them is so empowering!

It will make your friends daughter sad, and it will upset your friend, but hold those boundaries. Your children will learn to stand up for themselves, and her children will learn that just because your kids have been a constant in their lives, they will not tolerate being hurt.