She repeated few times that she does not understand why am I refusing free sex, my answer is/was that I want sex with my wife, and not someone who wants to be separated.
You are a better person than I am. I would have been tempted to look her up and down, and then say, "You aren't all that"! Or....."Hey, I have standards".
Man, she is really full of herself! May I offer a serious suggestion? Don't tell her you want sex with your W. When a WW thinks her H will melt at the idea of her having sex with him.......she really, really needs a rude awakening. Just turning her down does not work for this gal. You need to show her that she has lost your interest. Act as if you are not attracted to this woman she has become. You can't tell her in words, b/c she won't buy it for a second. You have to behave in a way that shows her you are not interested in what she has to offer.
What this may actually do is two-fold. One, she starts to reasses herself and why you are not attracted to her. Two, it may cause her to start wanting what she can't have.......which is you. It helps to shift the dynamics in this situation. Presently, she feels she is the one in control of the relationship. She should realize she's not the one running you.
It is not about what you feel should work in your M. It is about doing the work that gets the right results. Do what works!