Sometimes you do need to back off and let things happen on their own.
My youngest LOVES to cook. For many years (yes years), my ds and oldest dd would take advantage of this. They would be hungry, ask her if she was and would like XYZ, when she said yes they would tell her to cook it for them. She is now 10 and wised up to their game. They will ask her for something and she requires a trade, them doing their part first, before she will cook for them. She had to learn the hard way to make them do their part first. She also uses her love for cooking to trade up things like laundry. Getting to the point where they can negotiate to TIME!! Lots and lots of time. My children are now 16, 13, and 10.
Accept that sometimes you have no control and that things will work out on their own can be hard to do. Some of what you are seeing is just THAT. They will work out on their own. Take a deep breath....this too will pass.
After saying that, please do not rescue your youngest so fast. Give her the skills to manage her sister. Does your youngest say "lets play dress up?" and allow the older input. Does she get totally engrossed into her world and exclude the older child? Does she need to learn not to react? Even into adulthood you will have people that will be difficult just to get a rise out of you. It is hard to learn HOW to manage these people and to learn not to react to feed into them. Your youngest child needs to learn that your oldest dd is doing XYZ to get a rise out of her and the best things to do is not feed it.
If youngest dd is negotiating and trying to include, then you can look at your older child and say, "Your sister offered you to play. You said no. That was your choice. Now go find something you want to do."
I would watch out for times that your oldest is bored, redirect her: "It looks like younger child is enjoying XYZ, why don't we do ----. Or why don't you play ----." You need to respect your youngest need to selfplay times, but at the same time watch how long your younger one is involved in an activity. Once my middle one learned to read we had issues. She would read for hours and not interact with her siblings. This cause hurt feelings. So, I had to help manage time. Hey, why don't we XYZ then you can go back reading (your younger child might need this if she gets engrossed in what she is doing -- from time to time). I had to help her create a balance and include her siblings in her loved activity. Now, the three of them get into book debates. Huge arguments about plot, characters, authors, et It didn’t happen overnight. But it was a process of including each into a loved activity of another. Now, their interest are dividing again and I do have to tell my 13 year old to “suck it up” because as this developmental point she is very critical of anything that isn’t into her liking. She is old enough to redirect herself and keep her mouth shut when need be. They do not have to like or be like she thinks they should be -- we are at a difficult stage with her. My son really didn't go through this phase but I see it a lot in the 11-14 year olds.
Also, watch out for signs that your youngest isn't manipulating the situation. We had friends whose youngest did this. Her older 5 (boys) hated the princes (the youngest was a girl). My son and oldest dd filled me in on what was happening. They didn't like playing because the youngest one was good at playing the victim. It took the oldest to catch her on video being the drama queen. The boys were "ignoring" her by playing a board came (that was to old for her), so she just started crying and screaming like they had hit her. Mom, my friend, came rushing in scolding the boys for being mean and protecting "the baby." During that timeframe, Grandma had caught the girl crying and screaming because she wanted attention, blaming the boys. Three of the boys were at school, two were napping, but she sounded and acted like she had been hit because she knew it would get her attention.
My middle child (oldest dd) was good at trying to manipulate the situation. I was 3 houses down. I had left my 12 year old and 10 year old at the house. She called me crying. Telling me her brother kicked her and made her nose bleed. She was too upset to tell me what happen. I calmly asked my son. He told me she decided to sit on his face (he was laying on the couch). In the process of getting her off his face, he managed to kick/hit her face. When I asked her again about it, she admit that she was being the butthead and my son's action was in self-defense not intentional meanness -- just a desire not to have his sister sit on his face. She wanted attention and him to do her things. So be open to the possiblity that your youngest could be doing things to get her way and her her older sibling in trouble. During that time period, that was my middle child's goal. Was to look "good/better" than her brother. She
was wanting extra attention and wanting to make her brother look bad (this behavior comes and goes in phases).
My oldest dd (middle child) went through a phase that her way was the only way to play. She would do the things you are talking about to her older brother and younger sister. They would offer to play, she would say no. Then interrupt because she was being left out. I had to help her understand it was her choice and move her along before the "crap" happened. I also had to give her the verbal skills to try to include them in her way of play.
My oldest dd, middle child, also was the child that would walk off and do her “own” thing as a way to manipulate the situation. I know I am sounding like I am picking on my oldest daughter, but she is the youngest and the older child at the same time. So dynamics are a little different than just having two kids. She also has less in common with my other two kids. My first and third child share more common interest, similar personalities and creativities. My middle child is very creative but not in the same way.
I have at times lived by a timer. OK, we will do XYZ for 30 minutes then switch. Giving your 4 year old and 7 year old their own space might help. Redirecting the older child before it happens. Making sure that the youngest isn’t taking advantage of being “the baby” and knowing mom will rescue. Teaching the youngest, at the same time as the oldest, to negotiate and split time in activities.
When the youngest one whines ask her how she should handle it…..the same with the oldest one. Instead of scolding ask them how they can get the others attention or negotiate the play time.