She's not going to give up her destiny because Henry wants a son. Especially with a daughter living. Charles will not propose a different relative because he, too, sees no problem with a Queen Regnant.
She would give up her place as Queen however if that daughter were betrothed to the Dauphin of France, which she likely is at this time. Catherine hated France and while she'd have wanted her daughter married to her sister's son there's no chance of that happening here and the Dauphin is the only viable choice of a proper match for Mary.
Charles would also not have wanted the English crown to be directly inherited by the French. If there were a chance that he could get one of his sisters as Queen of England and their future son as King then he would have (gently) pushed his aunt to give up her claim.