I think you should aim for the middle. Like you, I'd be very uncomfortable just cutting her off, but there's no reason you can't start answering less frequently, and with shorter letters. If you normally reply within a week, take 3 weeks. And if you normally write 2 pages, write one. See what happens.
I admit there might be a wee bit of PA here, but your options are really limited. She's elderly and you're not someone who's part of her inner circle, meaning it's unlikely you can find the words that will get her to see the light. It's also possible she's relying on her communications with you too much (meaning she's not reaching out to those around her under the mistaken impression you're a good substitute. In situations like this, you can't possibly be.
Obviously, it wouldn't be wrong to gently make an observation here or there, but I think you'll be beating your head against a wall, and you'd need to keep your expectations very low. Personally, I'd just start phasing her out.