While your co-worker may be a Jekyll and Hyde, your manager is just Hide. You and your associates approached him with a problem that you tried to resolve, and his response was to work it out and leave him out. This is not management. Nonetheless, there are some steps you can take.
First, try to determine if there is anything that you and your co-workers may be doing to bring out this employee's negative behavior. You can ask this of yourselves, and you can ask it of her as well.
You should also ask her if there is anything that you and your associates can do to help her. At the same time, let her know that you need her help to make this work situation a productive one. Try to focus on specific incidents and the ways in which they could have been handled on a more businesslike basis, and be sure to avoid name-calling or labels like "nasty." By using this approach, you are more likely to have a discussion than an argument.
If you take these steps and still feel forced to do the egg-walk, then you should return to your manager and again ask for his help. If he still passes, you should consider bypassing him.
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