A dog can still cause an injury with a muzzle on. Its more difficult to teach bite inhibition to an older dog, but some breeds play rough anyway. If she were a terrier this would be normal.
Stop her from ragging the cat and redirect her to a rag toy. Make it very clear it is not acceptable, with a sharp No.
Make sure the cat has a clear escape route and safe place.
http://www.whole-dog-journal.com/issues/13_6/features/Bite-Inhibition_16232-1.html