I think that you need to follow your gut. If you don't feel like it's a good idea to move forward, then pull the brakes. I read that you're really concerned about making her dream of motherhood a reality and reconciling that with the idea that she may not live long enough to raise this baby. And while it is true that any of us could die without warning, most of us do no have a diagnosis of incurable cancer.
Long story short, it's not your responsibility to make sure that she has a child, even if she's your very good friend. If your conscience can't reconcile moving forward, then you have to do what you feel is right.