I agree with Toots. She was aggravated that you were winning.
Since she challenged your word, then you found it in the dictionary, too bad. You leave the word on, and she gets penalized. (But I understand you wanting to remain friendly!)
I would think that "jew", without the capital letter, would be considered slang (and nasty slang at that), and also would not be allowed.
(Outposted a little).
Now I'm curious - what other "offensive, eg racist" words are allowed in Scrabble? (no, don't post any, please - I'll go look at the dictionary).
I know if I tried to use Jew in Scrabble, playing with DH or my MIL (the scrabble maven) it would be thrown off the board in a heartbeat!!