R., this is a tricky one, to be sure. I am the oldest of 3 children. My brother, a year younger, was not very interested in playing with me when my friends were over (our activities were usually too girly, I suppose), though I often played with him and his friends. There wasn't any conflict, either way. My younger sister, however, always wanted to be included when I had friends over, and I found that undesirable.
My mother respected my feelings and rarely permitted her to do so, and I am grateful and impressed with her wisdom to this day (she was an only child, so she was flying blind on this one).
Her reasoning was that each child is entitled to separate and unique relationships with her/his friends. Seven-year-olds have plenty to learn about building relationships with their peers -- without adding the burden of incorporating a toddler into the mix (as you know there is a WORLD of difference between 4 and 7). So, it is not only stressful for the oldest, it inevitably dumbs down the games and activities, and deprives the older one of the "specialness" of her playdate.
Each child in the birth order has different issues and needs and perpectives. When you tell an oldest child that you are having another baby -- well, it's very much as if your husband told you that he's getting another wife (oh, but he'll love you just as much, and you'll see, it's going to be great! now go give her a kiss! and please take her shopping with you, she's bored!).
Of course you want to encourage her to play with her little sister, but when your daughter is entertaining is not the right time for this. Remember that she did not choose to have younger siblings. That was your choice. And it is your responsiblity to entertain the younger one when the oldest has company.
I love the shrinky-dinks idea, the pretty-in-pink party, etc(you've gotten some great suggestions)! Make the little one feel special, and give her some one-on-one time with YOU (something she'll probably appreciate far more than playing her sister and friend). Or, if you're too busy, get her a special activity she can do alone (a craft activity, a special video, some stickers...) Conversely, some activities are perfect for all to play...for instance, if it's summer, just turn on the sprinkler and let them run through it, etc.
I know you are concerned about the youngest feeling neglected, but please keep in mind that the older child has just as much right to feel neglected if you deprive her of quality time with her friends.
And, remember, as they get older, 3 years difference won't mean anything -- they'll likely become great friends. The last thing you want to do is build a foundation of resentment. best luck -- birth order issues are so tricky!
p.s. Oh, and as far as the sleepover goes, don't feel badly amount reminding the younger one that she'll be able to do this too, when she older...younger children end up with just as many perks, which the older ones will gripe about JUST as much -- i.e. the older ones "break in" their parents for them, and the younger ones usually get to stay up later and do all kinds of things at younger ages, etc. It all evens out in the end somehow.
p.p.s. If the youngest feels truly left out and sad about this dynamic over time, offer to take her to something special that the oldest is "too cool" for -- something like, "Blues Clues" on stage, a puppet show, or whatever is "in" with the tots these days. Let her choose and direct the activity, whether it's with the whole family or just her and a friend. Kick her a perk.
