Decline fellowship offer after writing proposal together
Life is too short to throw away several years of your career doing something you don’t want to do in order to protect someone from mild disappointment. It is nice of you to worry about the professor, but she is responsible for her decisions, and knew that the work she was putting into the fellowship application might not yield any return, either due to you not getting the fellowship or for other reasons. So in my opinion your moral obligation in this situation is no different from your legal obligation. By the way, the legal obligation would also be pretty minimal even if you had signed acceptance of the fellowship, considering that having a postdoc is not the same as being an indentured servant, and it is quite common for postdocs to decide on a change of career direction. 

Good luck!