I think that if you're friends with this person then you should be honest with her. Don't hide behind "we won't be able to make it" because that makes it seem like you're bailing on her.
I would call her to ask how her daughter is feeling and if she's still sick/not feeling well I'd tell my friend, "Listen, I know this isn't what she wants to hear, but maybe it's best to postpone this party. She isn't feeling great and probably isn't going to really enjoy it and I'm sure you don't want to get all the other kids sick either, especially if it's the flu."
After that, it's your call if you and your kids want to attend. If you've already decided NOT to go since this girl came home sick then be honest up front.
I appreciate polite, honest replies from my friends. I don't like it when people make excuses and "bail" without telling me why. It makes me feel like they can't be truthful with me - which isn't exactly what I expect from my friends.
I doubt she'd blame you for protecting your kids. Frankly, I'm on your side - I don't think she should be exposing other kids if her kid came home from school, nor do I think that she'd be acting in her child's best interest if the poor kid is so sick. A cold/runny nose is one thing, but a fever and chills is entirely different.