No advice. My ILs suck too. The whole lot of them. Trust me, even if you did EVERYTHING, this SIL would still think that she was the martyr.
I am very polite to my ILs, but very superficial and would probably do the same thing in your situation. She will believe what she will believe--and has for years, I suppose. She sees herself as the martyr whose SIL flirted with her husband. Never mind that she created all that in her mind or that she CHOSE to live with the parents. Somehow it seems to have become a part of her identity that she is the one who always suffers.
On the large family gossip thing, I thought it was just our family! I think that it is true that in large families, the gossip may be more vicious (more potential alliances, more room to take sides, etc.). It's a bit like Survivor . . . without the million dollar prize.