L.D.
Of course you shouldn't feel guilty! This woman has taken a ridiculous amount of liberties with your lifelong friendship and lowered it to such a poor level of respect for you, your daughter and your home, that she is no better than a panhandler! Look at the example she is setting for her children! If she has no utilities, I'm surprised the authorities or her ex haven't take the children from her.
Your home is also your daughter's. You're putting her in a position of having to regularly be shown she doesn't count in her own home. Is that the message you want her to grow up with when creating relationships?
You need to be frank with this so called friend and let her know as a single mother, you have rules for your spending and household in order to care for your family. If this were to go on over many years, think of the amount of money that could have been going into your daughter's college fund!!
This woman is not your friend. Friends do NOT take advantage of those they care about! Obviously she has also done this to everyone else she knows since she's having trouble finding a place to stay! If she doesn't want to step up to the plate and be a real friend, give me a shout! I have an 8-1/2 year old daughter who loves having her little friends over!