I think it depends on the temperment of your child. Some kids are just fine to be away from home overnight at an early age, yet some even as teens don't enjoy it. When my hubby was a child, he hated to be away from home or even have someone stay at his house. He REALLY liked having his own space. When I was a kid, I LOVED staying at a friends house, more than I liked having them at mine. My son is 5 yrs old, but has been sleeping over with his little friends since he was 3. Of course, these are families we know WELL and trust as if they were related to us. And he LOVES having friends stay over as well....in fact, last weekend I hosted a sleepover with him and two of his little friends, he then spent the next night with a DIFFERENT friend, then I had he and that same friend here the third night (Yep, I AM a sucker for punishment LOL). But seriously, the kids all know one another, all the families are friends with one another and so on.
If YOU aren't comfortable, you have every right to say no. She should totally understand. I have one friend who literally can't sleep well unless all her kids are under one roof with her and she knows that they're safe. So its all about personal comfort. If you DO decide to let him sleep over, of course assure him (AND the mom too, this way she doesn't worry that she will be disturbing you) that he can call at any hour to come home if he's unhappy being away.