Definitely cancel the Etsy transaction. It takes a few days to go through the process, but they'll refund the fees they charged you.
Use this as a learning curve; when I had my first return I was crushed. Until it made me change the way I do things and now I feel like my shop/items are so much better because of it. The customer was so happy with the customer service I gave her that she actually became a repeat customer.
Good luck!