I wonder if you should re think the allegation toward your GD, seeing it as a possibility because of the poor child's abusive upbringing during her first 5 years.
I agree with Smileless that it would be wise to reconsider re the allegation against your granddaughter, in the light of her inappropriate behaviour when she came to live with you. Your grandson is looking to his mother for support and too often children are disbelieved by adults because it is so difficult; there seems no reason, from what you say, as to why he should be lying. The poor child appears to have kept this secret for several years, how dreadful for him.
Your daughter has young children and will rightly want to take no risks with them. I cannot comment on why she feels that your husband must have abused your granddaughter...from what you have told us your GD could have learnt her behaviours from watching her mother as a young child. But if your daughter believes there is any possibility that she was abused by someone then she will rightly protect her children. From HER perspective you remain with a child abuser, and as she believes that she will struggle to let you be around her children, alone or otherwise.
You will never convince her she is wrong, the more you try, the more she is reaffirmed in her perceptions - especially in a subject of this magnitude.
I agree with Hitheres comment above. I think you have to accept her decision. Don't disown her. Tell her that you understand she must stand with her children. Tell her that your GD appeared to have learnt the behaviour from watching her own mother, not by being abused directly by your husband. Tell her you believe your Grandson (if you do!) After that it really is up to her.
I do understand how painful this is for you. I also understand your daughter's perspective on the basis of what she believes to be the truth. 
By special request, let’s discuss our favourite Classic Music and why?


