Do I tell her she is LYING?

I was in the exact same situation a couple of months ago. This girl was part of the Bloods gang, had triplets when she was 13 but gave them to her sister (but then she told us they died and other times they were alive), her father was the richest man in her state, and 90% of her bones were made of metal because she was hit by an 18-wheeler when she was 3 and now her hands are considered lethal weapons in certain states. I ignored her. Actually, the more I would ignore her the grander her stories would get. At first, I thought I should call bull on her, but then it got entertaining. It was ridiculous, the crap she would come up with! Nevertheless, her lying caught up with her when the bosses started noticing and she was promptly let go. I suspect the same will happen to your co-worker. In the meantime, enjoy the tall tales.