I just found out a friend of mine is buying gifts for my 2 daughters. Money for me is extremely extremely tight and I can't afford to buy for her kids...if she's buying for my kids, am I obligated to buy for her kids?

How about a nice handmade gift for them?

I thought about that, but I'm making gifts for every family member and I'm not even remotely close to the end of that and I don't think I would have enough time...She's getting earrings for my older daughter and toy walkie talkies for my toddler...

IMHO you need not buy but the suggestion above is good.

HOw old are hers? Maybe a little something from the dollar store would make them happy?
Or if she is a good friend, could you explain your situation to her?

Her daughter is 8 I think and her son is 15...

isn't the reason for the season...giving? i never give a gift (expecting) anything in return...hense....gift...i would not feel obligated to buy for her children just because she (is choosing) to buy for yours...maybe she knows your finances are very tight and is just trying to be 'charitable' during the season...i doubt that she is trying to put on on the spot or cause you further hardship. for anyone to (expect) a gift is a sad state...

How did you find out? If you don't usually exchange gifts, you wouldn't be expected to do it now. Did someone tell you so you would know to get gifts for her kids too? I always have little "gifts" under the tree for unexpected events like this. Go to a store that has little boxes of chocolate samplers, or inexpensive novelty items. You can pick up something for two or three dollars.

She told me herself. I told her we can't afford to do anything and she said it was ok, she's not expecting anything, and she wants to do it anyways. The thing is, these people are our friends but they are very irresponsible with their money...they're house has already been foreclosed and the bank owns it. I told her NOT to do it, but she's insisting and says it's the little joy that she has left...

Make the kids a batch of holiday cookies. It's not expensive, and won't take long to make. Problem solved.