This seems an awfully difficult situation to handle...(especially as it seems your lives are closely linked at the present..) Have you talked about this with anyone else in your family? Husband or grandmother? I think distancing yourself for a while is a good idea, you need to take a breath and then think of a more permanent solution. And it is probably worth talking about this with your doctor as well. If she does need medical help, you're not in the position to do much about her...And since you suspect that indeed she is mentally unwell, I would say try not to hate her..! It might give you some peace to think that it's not herself, which she probably isn't, and deal with her with that in mind, avoiding conflict when you can, and not getting engrossed in the arguments..

I hope things get better soon and sorry I couldn't come up with any better advice!