Hi Omaha. What a horrible situation. I think of all the horrors you've written about this one scares me the most.
Caught in the act of holding her 3 yr old bro on floor, face down, standing on his back. and how she had planned to suffocate them both and she would have to stab her with a kitchen knife..
Now, 2 years later and there's serious physical violence to the child. And, being in a step parent situation can be another problem too. Is there a father in the picture? I guess the reason I ask is that due to the physical danger to these children, if there's a father in the picture then perhaps he can have custody in such a way that you and your wife only have supervised visitation with this child. However, in real life, often that's not possible.
I'm sure you're aware that where there's a danger - to the mentally affected person or others, more can be done. What that is depends on where you live and what resources are available. All I can advise is to 'don't argue' with her. No means no, that's my (our) decision. End of discussion. Say no more. I hope your wife can get over her denial. Do you have a journal of events that have happened?
Her cruel nature is terrifying to say the least. Pets cowering and running away would seem to indicate that there is abuse going on to them when no one is looking.
Please ask the medical people who have diagnosed your daughter for help. They're the ones to get the medical wheels in motion with knowledge of what's going on in the event that this girl needs to be removed from the home, or that you need to take your boys and flee.
Hugs to you
femfree