If I'm not mistaken, the reference a school gives is not specifically targeted at any one university, but forms a part of your UCAS application form that goes to every university you apply to, so I don't know what your teacher is saying about not being able to write an "Oxbridge-standard reference"? I thought they just put "is a strong student and is capable of undertaking further study" etc. for everyone in order to help them on their way. So if your teacher is saying she won't write you a good reference, she means that she won't do this for any university! Which is stupid given your exam results, and a stupid position for the school to take.
I think it's shocking that your teacher is discouraging you from applying, and deliberately placing obstacles in your way. Why the hell does where you apply affect the reputation of the school? It's a completely ridiculous, and this teacher needs to be told so. I'd personally come in and give her a slap, if I could! She must have a chip on her shoulder or something, given that she's the only one effectively "controlling" Oxbridge applications.
I say, apply to Oxbridge and give it your best shot. If you think your teacher will write a worse reference because you have applied to Oxbridge, then simply don't tell her that you have - they have no way of finding out. Also, research the avenues of getting a teacher with whom you have a good relationship for a while to write the reference. If you insist, I'm pretty sure the school can't do anything.
Also, request to see the reference after you have applied - they must provide you with this information under the "subject request" section of the Data Protection Act. If it is a clearly unfair reference, then go to your local paper and get this freak teacher bad-mouthed. She seems like a right c0nt to me, if you don't mind me saying.
Rargh, it's late, and I hate people like you have described.
Anyway, yes - APPLY APPLY APPLY!