I remember a few years ago, in art class in middle school, we did some pottery and of course, it had to be baked in the kiln in the art room. Mr. Art Teacher explained to us that many will use newspaper to light the kiln, but he wasn't allowed to do that because it could put off toxic fumes. I honestly never thought about it though and never went digging for an answer, so I don't know for sure. However, a sauna is much different from an actual fire, and from the way Mr. Art Teacher explained things, it was actually burning the paper that could put off the fumes, not just getting it hot like a sauna would.
I think this lady sounds like a complainer, as PPs have said, and it was completely unreasonable for her to object to you actually reading it while you're using the sauna. However, just as a precaution for your belongings (and as a consideration to others, so it's not taking up any seating space), I wouldn't leave it in there when you step out of the sauna. That said, the woman was way too rude in her demands. She could have just politely asked you to refrain from leaving your belongings in the sauna when you're not in there with them.