Your fiancee needs to talk to her. Not you. You should each handle your own families.
You have two approaches you can take. Talk to your fiancee, decide which one works best for you, and then your fiancee needs to talk to her mother and lay down the rules:
Option 1: "Mom, we've already set the budget and venue for the wedding. We can offer you 65 guests, absolutely no more than that. Get us a guest list by next Friday if you want us to invite them."
If MIL argues, your fiancee needs to say, "Mom, this is non-negotiable. We can only accommodate 65 people from your list. No more. You can invite up to 65, or if you want to argue about this then you can invite zero. So either get us a guest list of no more than 65 people, or else you'll get no say in the guest list. This is not up for discussion." End of story. Your fiancee should hang up the phone or walk away at that point.
Option 2: "Mom, our budget only allows us to invite 130 guests, which means that each family gets to invite 65 people. Now, if you would like to invite more than that, we will need you to cover the costs for any additional people. We've crunched the numbers and it would cost $X per person ... that includes a bigger venue, food, drinks, stationery, extra centerpieces, chairs at the ceremony site, and favors. If you can get us a check by next Friday and a list of the extra people you want to invite, we will sit down with you and make sure we can accommodate everyone you want."
Again, if MIL complains then your fiancee needs to shut her down and tell her that the terms are non-negotiable.