She knew. I think she knew it long before, because she says "...and then you got married" in almost a teasing way to Michael.

She wouldn't have said it that way if she was being hit with this news for the first time, after 30+ years... It would be a lot more bitter and angry.

After Michael has been back from Sicily for a year or more and reconnects with Kay, there's no reason for him to lie about it; Apollonia is dead and gone, so there's nothing for Kay to be jealous about.

I always take this line as something they've talked about long before.