Well, the shower may not necessarily be a work shower - the coworker may be a close friend of the mother-to-be in addition to being a coworker, & the friend/coworker has volunteered to host a baby shower & wants to include friends, coworkers, family, etc.
The original post is not very clear, but I could see different scenarios happening -
* the coworker already had a list of invitees & whom she planned to invite, but needed the addresses, so she contacted the mother for only the addresses
* the coworker had a list of invitees but needed both addresses &/or the names of additional guests that the mother-to-be wished to include, so she contacted the mother for both names & addresses - in the original post, she said she was contacted for names and addresses, but I'm not sure what that means - did the coworker just need clarification on the full names or was the coworker asking for the names of people she needed to invite?
In the above scenario, I could see where, when the OP was giving her niece's name & address, she would ask about the niece's daughter.
I've been involved in showers both as the guest of honor & as the hostess. 2 coworkers hosted a baby shower for me, & they asked me for any names of family members that I wished to invite since this baby shower was the only one I was having. I didn't go crazy & only added my mother, mother-in-law, sister, & 2 sisters-in-law.
However, I've also been the hostess of a bridal shower which I attended to be a family shower for about 25 people. The guest of honor asked me if I could invite a "few" of her friends as well, &, when I said that was fine & asked for the addresses & she gave me her additional list of invitees, suddenly I found myself hosting a shower for over 100 guests - for which I was not prepared. I even had to change the venue.
Again, I can see legitimate reasons why a hostess needed to limit the guest list & not include younger children. I could also see where she might have been taken off guard when the OP originally asked her about her niece's young child.
I think it depends on how the niece's child was originally included - and was the niece's child's name written on the invitation? Or was it more of a "Would it be okay if niece brings child?" request? The hostess said yes, but, now, that she's given it more thought she realizes, for whatever reason, younger children can't be included.
Regarding the other children, it really does go back to whose names are on the invitations.
OP - it really doesn't have to be stressful & drama-filled. I originally said the hostess needed to contact the niece, but, since you're related to the niece, I can see where the hostess would feel more comfortable w/ you contacting your niece, especially if the "invitation" to your niece's child was just word of mouth from the hostess to you to your niece - after you asked the hostess. Just a little "Oops! I was mistaken! The guest list doesn't include young children..."
And then go to the shower, enjoy the time w/ your daughter, &, afterward, thank the hostess for giving your daughter a shower.