Just say: I am sorry, but you smoke, the answer is no.
If she pushes it or looks offended or put out then explain:
The residue, the tar and smoke particles, on your hair and skin and clothes is dangerous to developing lungs. I can smell it from over here, and you're not holding me thereby forcing me to breathe in the loose particles. Unfortunately, the last time I let you hold her she had a bad reaction a few hours later and it would just be irresponsible of me to hand her over to you or any smoker again. It's a shame you choose to smoke, but I just can't risk it. This is not in any way personal, okay, I just won't let any smokers hold her again.
Being an ex-smoker myself I can say confidently that while it IS an addiction, smokers CHOOSE to smoke, and it is their god given right to do so, but that comes with consequences, like not being able to hold babies and having to stand outside in the rain, sleet or snow, or scorching sun to enjoy their nicotine. She'll just have to be a grown up about it.