Mom has always been a vivid dreamer. How can I get her to come back to reality?

iso280zx, you sound like a caring, concerned person, and MIL is lucky to have you on her side!

Sometimes how we think about things makes them a little easier or harder to deal with. You MIL is NOT "lying" about the dream thing. She will not be convinced by the TRUTH. This is a cognitive/mental problem beyond her control. Each repetition gets more elaborate, with more details? Head her off at the pass, and deal with it immediately each time it comes up.

She has dementia. Reasoning with her about this ain't gonna cut it. Sorry.

I wonder if reassurances would work any better. (Maybe not ... worth trying.) "Oh Mom, I know how much you worry about that, and I've taken care of it for you. It's all solved now. I've got it fixed so it is just the way you want it.) Don't worry about whether her concerns were real or dreamed or a total figment of her imagination. Her reality is that something is wrong. Try comforting her with the assurance that it is now fixed. Keep it calm and brief, and who cares if you have to repeat it many times a day?

You say "yes she does have moderate to severe dementia. No altzhimers tho thank goodness." There are something like 50 different diseases that include dementia. Alzheimer's is the most common and most widely known, but all of the other kinds are also really and truly dementia, with their own symptoms and cognition issues. Just because her kind of dementia is not AD doesn't make it any less real or any less of an issue for you to deal with.

She is not lying. She has dementia. Techniques that worked when she was well just are not going to work any more. This is the sad and devastating truth caregivers of people with dementia bump into over and over, whether our loved ones have Alzheimer's, or Lewy Body Dementia, or Vascualr Dementia, or any one of the dozens of dementing conditions.

Good luck.

Thank you for your response. Let me clarify a bit. Mom is my MIL. BUT she's been a Mom to me for over 45 yrs, she stepped in when my mother couldn't be bothered. My husband n I are the only ones that even bother with her.
She'll move in here before I'll put her in ne kind of home. As long as she stays in her own little world in her house w/ her tea, cigs n tv she's ok. And yes I have taken her to her Dr. Going again in august. She's reasonably healthy for her age n yes she does have moderate to severe dementia. No altzhimers tho thank goodness.
I guess what I wanted to know was if there was ne thing I could give her to stop the nervous panic crap and her obsession with perpetuating this dream lie. Each time she gets into it now it just keeps evolving into a bigger lie with more details.
Sometimes I just want to laugh it off n other times I could scream.
I've even tried to ignore it by not acknowledging it when brought up. But she looks so frail n pathetic I crash n burn n give the same answer over n over again.

After taking some time to read all the related posts it's nice to see I'm not alone in my frustration.

I think you need to take Mom to a doctor and explain all of this. Sounds like she might have dementia coming on as well as her other problems. Valium won't cure what ails her. She might need to be in an assisted living facility where she has others around her but you should get a financial power of attorney and explain to the judge what the son tried to do.