I'm not sure that your MIL's issue is with your daughter's weight per se. It sounds like she's exercising control since she has the other grandchild with her all the time, she's trying to control you and your kids. If it weren't the weight, it would be something else. It doesn't matter if the grandson is light as a feather or weighs 400 pounds - she STILL shouldn't be talking like that to ANY child. And you are right to worry about all children, but particularly girls in our culture, and body image worries.
I think your husband has to step in because it's his mother and you will always be the bad guy. Some of this may be because your HUSBAND isn't listening to her anymore, he's grown up and gotten a wife! HE needs to step up and say to his mother that she must stoop commenting on the daughter's size, weight, clothing, etc. And then say that he has instructed you (I know it's sexist but it's the only way SHE might take it in) to remove the child from her presence every time she does it. It's his job to protect his family and he will do it. It's not clear from your post whether MIL only does this in front of you, or if she does it in front of your husband too. If he isn't hearing it directly from her, then he needs to tell her that your daughter said Grandma says she's fat, that she is worried she isn't pretty, etc. He can say that he asked you, and you backed up your daughter, but this will make you look like the tattler. He needs to tell his mother that this is absolutely damaging to her psyche and that you all, including her pediatrician, want it stopped. He should ask his mother what she thinks she is accomplishing by telling the child this, what she hopes will happen, what she wants the child to do about it or think about it. Sometimes getting people to explain their actions shows them that they really can't express why it's such a hot idea. She'll probably say, "Oh it's no big deal." And he has to come right back at her and say, "So why are you doing it? What message are you trying to convey to my daughter?" And he needs to say he doesn't want his daughter around someone who talks like that - he wouldn't allow it in, say, her teacher, or later on in her boyfriend. He can also tell her about the lip kissing - that he thinks it's inappropriate or gross or whatever.
Another tack to take is when MIL says something ridiculous like "Oh no, she MUST be in size such & such" is to sit there quietly, with a quizzical look on your face, and absolutely NOT respond. I know, I know, it's tough! But opinionated people like her sometimes get a charge out of the argument. Just looking baffled and making her fill the silence can be interesting. You could then slowly ask, innocently, "Why would you think that I don't know what size clothes she wears?" You could also let the silence lie there for a few minutes, and then look at your watch and say "Oh my, look at the time, we really must go." And remove your daughter from the situation. Your MIL will argue but you have to say "No it's time for us to go." And it IS time, if your daughter is being hurt. Your husband can then tell his mother that you had a choice of putting her down for her cruelty, or removing your child from the situation, and you chose the more neutral way. You then must say to your daughter, in front of your MIL, "Don't worry honey. Sometimes Grandma says such silly things that she doesn't mean. You're just the perfect size, and the doctor and Daddy and I say so."
You can also teach your children to turn their cheeks when kisses are forthcoming, from anyone. Encourage affection with grandparents - good hugs are great. Encourage them to say "I love you". Encourage everything but the kissing on the lips. I wouldn't use the "germ" argument because the disease experts say that more colds and infections are transmitted by people's hands than by kissing - people sneeze into their hands, blow their noses, etc. In fact, they are telling people to sneeze into their elbows now - just bend the arm in front of the mouth - otherwise you shake hands or touch a doorknob, and the infection is on the move. The other big problem, of course, is insufficient handwashing after using the bathroom - they've done filming and germ testing even among hospital personnel, who should know better - we're just a rush-rush society and people don't take the time to really suds up their hands. Since your MIL is a controlling person, you might want to consider NOT going the "germ" route on the kissing - she'll tell you it doesn't cause colds, and she'll have a point. Just deal with it being inappropriate and you don't want your kids learning that it's okay if you feel it should only be done in romantic relationships or whatever it is that you both think.
Good luck with this - controlling people are hard to control, but your daughter's self-image is already being affected and you are right to step in. Try to choose your battles and not get in your MIL's face about other things right now if you want to have her focus on this big issue of weight/size.
