Yes, Connie knew Mike had Carlo killed, and I think GF2 and 3 makes it clear that after some time of drinking and whoring to "punish" Michael she came to realize that, as she told Mike, she understood he did what he had to do to protect "the family." Also, she finally realized that Carlo was in fact responsible for Sonny's death, so she probably put that punk out of her mind, at least I hope she did.

Don, I agree, the development of Connie's character was the most interesting. For a time, After Michael's stroke, she was running the family, and how she ran it proved she was her father's daughter.