A book I ordered was returned to the sender marked "Refused".  The problem is that I NEVER received the book.

How do we (the sender and I) handle this situation??

I thought I could cancel the request so that she would not lose her place in FIFO, but it was too late for that....

Have you confirmed with her that it has hte correct address?  If the address is correct she should take it to the post office and let them know that she has contaced you and that you didn't refuse delivery of the book. 

It sounds like it was misdelivered and instead of writing wrong address or bringing it to the PO the person who got it wrote refused on it. 

I agree, if she prints out and takes with her your response showing your address to match the address on the pkg, and your statement that you did not refuse the pkg, the PO should send it back out, without any additional cost. No guarantees, but I've heard of others that have done it successfully.