This sounds like my husband, before he was my husband. I do want to point out that while it most certainly is not a good example, it is also not necessarily abuse. Even back then (when he was still with his ex-wife), he would only curse at the boys when he was either really angry or they had just scared him out of his wits - the younger of the two had a tendency to punch windows and break them when he was little, for example.
Here's what I suggest, having been in a similar situation: for one thing, you are his mother-in-law. While he doesn't have to like you or do everything you say to the letter, you do deserve his respect and he should be reminded of this. Take a hard line on it. Yes, it may upset your daughter, but she should also be able to keep at least a loose leash on her husband. If she can't perhaps she needs to reevaluate her relationship with him, because he obviously doesn't value her opinion enough. If your SIL is unable to respect the woman who gave birth to his wife, perhaps he should not be around you. My FIL used to have a big problem with not being able to go much of anywhere without a beer in his hand, and I eventually told him that if he didn't want to rethink that stance, he would not be welcome in our home when the children were there.
Second, you should have a little heart-to-heart chat with your daughter. I'd suggest inviting her over for lunch sometime so its just you and her and you don't have to worry about being interrupted. I know a lot of women tend to either dismiss their husband's faults (especially to their parents) or complain about them too much (usually to their friends), but she needs to know how you feel about her husband's actions and attitude. Let her know that his language is completely out of line when he uses it around the kids, and that you won't tolerate it. If she knows your feelings on the matter, she shouldn't be as shocked when you get fed up and snap at him.
And finally, don't be afraid to tell him how you feel. If he gets all blustery and tries to use that line about "not telling him how to raise his kids", calmly point out that you have raised X number of children, at least one of which he seems to think turned out alright, since he's married to her, and then proceed to give him a dressing down like he hasn't received since he was in short pants. Don't worry about doing it in front of the children - they need to know their daddy's actions are not acceptable behavior, or they will repeat it. If he still refuses to respect your position - in your presence, at the VERY least - just tell him to leave, or leave yourself. It can be difficult, because it can create a rift between you and your daughter, but don't let the situation fool you: it's HIS fault, not YOURS, because he is the idiot incapable of respecting the wishes of anyone not himself. My guess is, even if your daughter sides with him initially, she will still want her children to know their grandmother in the long run, and will eventually bring them around to see you either without him around, or with the choker chain on her husband.
Don't get me wrong, I'm not trying to tell you how to run your family. I've just been in a situation very much like this one (with my own husband instead of a son-in-law), and this is how I dealt with it, with a few tweaks for your particular circumstances. I know some people are not as blunt and confrontational as I can be, but in this case, it worked out pretty well for me - my DH now tries hard not to curse around the kids, and by extension doesn't curse as much at all anymore.
As far as the quilt goes (that was the point of the post, wasn't it? Sorry, lol) - just consider it for your daughter. If you don't get it finished by Christmas, don't sweat it so much - you can either bring it out for your SIL to see what he's GOING to get when you do finish it, or you can take your daughter aside and let her know it's going to be a bit past Christmas before it's done.
Good luck, and we'll all be praying for you and your family this wonderful holiday season! Don't let the stress of it all get to you - we've got a Birthday to celebrate!
With all the love and prayer in the world,
Sloan