NOOOOOOOO. With that many "O"s...because that would resemble the horrified look on my face.
My rule for lending anything out - be it purses, books, DVDs, CDs, etc. - is only lend it out if you're ok with it coming back damaged or not coming back at all - and the person not paying for repairing/replacing it.
Also, you do not owe your co-worker anything except possibly a simple explanation along the lines of what other posters have said, and incorporating what you said to her as well: "No, I don't lend my purses out because I've had some bad experiences in the past regarding that. But let's go shopping to find you one!"
On a side note, one thing I've learned about carrying out expensive items is that some people who see you carrying them will try to take advantage of your finances and/or your possessions. I'm not saying that your co-worker was intending on doing that, but just be aware of that possibility. Women tend to feel guilty when denying a person a request (e.g. you felt bad when you denied your co-worker's request, even though IMO, and in the opinion of most posters in this thread AND most ordinary people, it's an outrageous request!), and people take advantage of that to try to get what they want.
Anyhow, I hope you continue to feel better about your response. I find gut reactions are generally the right ones - and in the end, you got to do what you feel comfortable with. Good for you for going with your gut!!!