I'm assuming she is visiting your home that you contribute in and provide for. With that assumption, here's some tough love that I wish someone would have told me years ago:

1 -- Grow a backbone, this is your house. You own it. You own everything in it. She is a guest. If she doesn't like it she can leave. End of story. Remember: "No." Is a complete sentence, you don't need to explain yourself.

2 -- You just learned an important lesson: put your nice knives away when company comes over, unless you KNOW they know what's up with knife use/care. I have a cheap set of knives I keep relatively sharp and well maintained for when people want to "help" me cook.

3 -- What in the actual fuck. Tell her you ruined her knife and, "didn't she know she wasn't supposed to do that? I can't believe her mother and grandmother didn't teach her though, I would be embarrassed ..." and then casually mention that knife sharpening is $20 at your local butcher. Worth a shot.

Well, that's my passive-aggressive way to deal with MIL's, at least in my own experience.

I don't know the details of your relationship, your history, whether you are a man or a woman or what your background is at all ... but I guess, at the end of the day, you have one question to ask yourself:

"Is the status of my favorite knife more important than the relationship of my MIL?

Remember, people tend to be duller than knives, and in this instance your MIL was definitely dull. But, you can sharpen your knife, you know? Or hell, you can even replace it altogether. Doubt that's a possibility with your MIL.

At any rate, I recommend going with the passive-aggressive approach as to not hurt feelings. Next time hide your nice knives and let her use a crappy one, she probably won't even know the difference.