It is most assuredly not rude, rude is her treating you like that in your own home, as they said above, be straight forward as possible. Reference her situation, and your own, your health and baby comes first and if she can't follow the rules she'll be out the door. Good luck and best wishes
I agree with Clysta. If it is your house then tell her to take care of her dog or move out. My brother lived with me and my husband for a summer when he was home from college once and I had a set of rules and he made sure to follow them. His dog stayed outside with my dogs and there was no smoking in the house and a laundry list of other things but he respected my property and didn't try to take advantage of anything so it worked out. I would have a talk with your sister in law and and basically lay down the laws with her. If she can't follow them then kick her out. Your baby's health comes first and if she can't deal with that then she has no right being in your home.
You should leave her dog outside and hope it will run away..lol but if i were you i would tell her to start picking up after her dog or find somewhere else for the dog to go cus thats nasty and esepically if you have a baby there.
You need to be completely frank and blunt. If its your house, she has no right or business to tell you to get over it. She needs to either be more responsible about her pets, get rid of them or get out. Be firm about it, and don't make empty threats. Follow through with what you say - she could take advantage of it because she doesn't think you guys would really kick her out.