I know that one of my (Jewish) work colleagues is stealing from our (Jewish) boss by invoicing him for hours allegedly spent working, when she is not. To make matters worse, I had considered her a friend and now I do not know what to do. Do I confront her, do I tell the boss ? I am losing sleep over this dilema.

You should confront her- maybe she has an explanation you are not aware of. If after you speak to her she does not stop stealing and if your boss will believe you if you tell him that he is being robbed (or if the books will verify your story), you have an obligation to inform him.