I would limit my contact with her to work related issues. When she goes off on tales I would just ask if she was finished with the work related discussion & just say you have other priorities you have to take care of (even if that is just getting away from her)

Not much you can do about her lies & tales unless you talk with the person in charge of her. Pointing out her errors will just start an argument. Broken brains sometimes don't even see their own brokenness.