I would describe blocking as the face book equivalent of the cut direct - you prevent the other person from having any contact with you, or ability to see if you're even on Facebook.
De-friending refers to removing someone from your friend list, so that they can no longer see your friends-only postings, but can still see your presence on Facebook, and content that is visible to anyone, or possibly friends of friends.
Under the privacy settings, you can tailor the amount of access that someone has to what you post, or what you see of their postings. So you can remain friends with someone (so they don't get offended) but seriously scale back what they see of you.
With the privacy settings, people could figure out that they are on restricted access by comparing with someone else's access to your page.
For the last one - I'm not sure if you can set it so they can read your posting, but not what your friends post in response. It would make for very strange conversations, if she can see some of the responses, but not all. Your friends might be able to change their privacy settings so she can't see them, though - you'd have to check the privacy options.
As an aside - the original Facebook settings were for Friend, Un-Friend and Block. The whole filtering and setting different levels for different people came later, for cases where de-friending was too harsh, but you didn't, say, want your mother to see you posting about that awesome party last weekend, or to keep boundaries on people who tend to start flame-wars or insult people.
