You need to find a way to speak with her alone.
Her husband can watch their son one evening for a couple of hours while you 2 go for a margarita.
Be honest with her and apologize that you are sure she over heard your conversation. Tell her you never wanted to hurt her feelings, but were just frustrated and afraid of telling how you feel.
Then tell her how you have felt. How it feels when her son hits other kids and it feels to you. lIt concerns you that maybe he must not understand how serious his actions are because he continues to do this. Also mention that you all love spending time with them, but it makes you nervous that a child may be seriously hurt and that would be terrible.
We had a very close group like your neighborhood when our children were babies all the way till high school.. As a group, we were pretty much on the same page about expectations for behavior. If we noticed someone else's child upset , whoever was closest would comfort that child. If the child became angry frustrated, whatever again any of us would help that child. If a child hit, pushed yelled, we all would use the same types of corrections.
"Ryan, we do not hit. Looks like you need to come and sit down".. Or "Ryan we do not hit, what do you say to Rachel?" "Suzie, Ryan was riding the motorcycle. Will you please share in 2 minutes? Ryan, look how nice Rachel is, she is giving you a turn. Rachel give me a high 5. "
"Sand is not for throwing. If you throw sand, you will not be able to play in there for the rest of the night. "
The more we all did this, the better easier it was. I think we learned a lot from each other and our children were all on the same page.
I know you feel bad and you would never want to hurt any ones feelings, but now it falls on you to apologize and let her know your concerns..
You pay for the drinks.. Hee, hee...