Although it isn't an issue between you and your spouse, it is an issue between parents and children. Haven't you both discussed beforehand how to deal with these questions when they come up? Ideally it should be done before the questioning happens. At this point, you and your spouse need to discuss how these things will be dealt with. It is a personal decision for you both with no right or wrong answers.
First, I think the person to answer is the one she asks. But you need to work out an answer that respects both positions without putting pressure on her to choose -- at least now. Perhaps along the line of "Your mother believes there is a god, and worships him. I believe it's something you need to decide for yourself, after looking at all sides of the issue and talking about it with both of us, and others." And on from there.
She is seven, not stupid. You would be surprised how capable little people are. Be honest; explain that you both disagree on this point and that you feel that’s it make believed, while her mother feels that there is a good possibility of a god. This is a great lesson. It shows her that it’s OK to disagree with somebody, while still considering them a good person. Explain to her she needs to make up her own mind on the matter, but that she has her whole life to consider the evidence.
Most of all, and I wish people had told me this as a kid, tell her she is allowed to say “I don’t want to talk about this, its private”. At her age, she should never feel pressured, threatened with hell, or told she needs to debate.
On as side note, make sure her entire social life in not in the church, she could need outlets later in life. And if possible, make sure the fake holy person is aware that if she is pressured, you will reconsider her attendance.
There's a book called "Raising Freethinkers" which might address this issue, I've not read it yet, but have been wanting to check it out.
This could actually be a chance to teach scientific method. Rather than just you saying "No" and your spouse saying "yes", you could teach the child about evidence and good/bad science. It's a horrible thing to indoctrinate a kid, I grew up believing that my nonchristian father would burn in hell for all eternity when he died, that's not a healthy parent/child relationship. Teach the kid how to look at evidence and you'll have the comfort of knowing that s/he will be able to aproach other life issues with the same rationality.
Since diplomacy is important here, have you asked your wife how she feels about it? Would it be a problem if you just said you didn't believe in god?
My impulse would be to say:
I don't believe any god exists.
Your mother does believe in god
It's ok for people to disagree on things like this.
Thanks for the ideas. Here's how it went:
Parents: Remember when you asked the question "is God real?" That is a question that you have to answer for yourself. Some people believe in God, some people don't. In fact, many people believe in different Gods than the one you learn about in church. Have you ever heard the word faith?
Child: Of course I have.
Parents: Well, faith means that you are willing to believe something even though it might not be true. Mommy does have faith but Daddy doesn't.
Child (with tears welling in eyes): But I want the whole family to believe the same thing.
Parents: Sometimes that just isn't the way things are.
Child thinks silently for a few seconds and then says: Can I have my birthday party at the community pool?