There are things you can do to stop her B.S. thievery.
1) You can file a claim against her with Google for violating the Digital Millennium Copyright Act.http://www.google.com/dmca.html
And it would seem to me that Etsy would suffer a lot if more people did this, since they seem to not really care about copyright infringement at all. But they DMCA says they HAVE to care!
2) You can report her to RipOffReport.com.
3) If you can determine her ISP, you can report her to them. Use a DMCA Take Down Notice to do so and the ISP will have to pay attention to that, and it can result in her losing her Internet provider.
You should definitely be watermarking every photo you use in your site. There are websites that do this for free, and programs you can download for free to do it also. It only took a couple of my own photos being stolen (though not on Etsy) for me to learn my lesson. And just be sure that when you watermark you don't put the watermark in a place that it's easily removed/cropped out. It's sad that we have to do this, but unfortunately, we do.
Formally registering your photos with the US Copyright Office is the only way to have a leg to stand on in a court of law, if it were to come to that. "Poor Man's Copyright" (sending yourself things through the mail w/copyright notice on them) does NOT stand up in court, just so you know.
Most people who sell online don't legally register all their photos, but it is an option. That being said, all of your photos are legally protected by copyright law the minute they are fixed in a tangible form. But the registration is necessary if you were to go to court over something like this.