She doesn't count as small and you can leave her as medium.
Strictly speaking: small's made for halflings and goblins as key examples. Unlike previous editions, D&D 4e doesn't have any guidelines for what height converts to what size1 but halflings, the PHB1 small race, are usually 4'2" at most. Your character is not quite that short. They don't become small just because they're a little below average for a human. The rules are happy to continue to consider you as a medium human even if you do become close to that short.
You could count her as small if you want, for a joke.2 However, you should be aware of the potential drawbacks that come from being small and make sure they either don't matter that much to you or that it's worth it anyway. Or count her as small, but agree with your group to ignore those drawbacks. You're doing this for fun after all, and those drawbacks mainly just suck anyway, since 4e offers little inherent bonus to being small and it doesn't totally make up for the drawbacks.
1: PHB p282, right hand side, or Rules Compendium page 201. There are no height or weight guidelines at all, so we can only derive those as loose guidelines from various races of those sizes. Larger creatures than medium take up more squares, but that isn't necessarily correlated to height or weight. Small and medium creatures have the same squares.
2: You'll be pretty big for a small creature, but 4e doesn't care enough about what makes a small creature to make this a problem, and neither will you probably if you're doing this for a joke. 4e's priorities are elsewhere, and a foot of height difference is unimportant among them.