W., I agree with others about not telling her. But allow yourself to process it, since surely you knew this lady for many years yourself. Send a card, make a donation to an appropriate charity in memory of this lady, send something to the daughter who called, whatever works for you. Mark this passage yourself since your mom cannot.
I truly, truly feel for you in this sad situation! Seeing our parents' lifetime friends die is tough because it only reminds us of our parents' mortality too. When my mother was in a nursing home (not dementia but other issues), I chose not to tell her that my husband's uncle had died or that an old friend of hers had died. She herself did not live much longer after those deaths, and I truly think telling her about those deaths would have made her more depressed and hastened her own end. Had she taken a turn for the better and begun to really recover, yes, I would have told her in time, but certainly I am glad she died not knowing those two friends were gone. In your case, where your mother won't even remember the fact and will experience the pain anew each time, and be confused -- I would agree not to tell her. I gains you nothing, gains her nothing, does not even allow her to express condolences to the family as she would wish to do if she were fine.
Again, you have my sympathies for your own grief and for this sad dilemma.