Muffin, also bear in mind that "the gossiper" wants to clear his name.  By owning up and admitting what he did he wants to get back into everyone's good books.  He still said something he shouldn't.

The co-worker in the meantime is miffed that you 2 are making up so to speak so she is huffing and doesn't want to get involved.  Shame really considering she got involved in the gossiping in the first place!

Good luck with the mediation session.  In my opinion, neither of these individuals are to be trusted.