No, they don't have a legal basis to demand that you stop until the patent issues. But they can get damages from the time they put you on notice if the patent ultimately does issue. And now that you are on notice, you should ask for the "publication" number, not the patent application number (or both). That damages provision only applies for published patent applications, not unpublished ones.
You really should get a lawyer involved now. If you try to handle this on your own, with the knowledge that you have, you will get yourself in deeper trouble.
Just to clarify one issue, if the pending patent is for a design patent (which is possible considering they are claiming copyright and patent protection for the same item), pre-issuance damages are not available to them. This is because design patent application are not published prior to issuance. As mentioned above, you are best served by consulting with an attorney in your area sooner rather than later. This lawyer will know how to find out what rights are actually being asserted and which of your products are allegedly infringing those rights without make any damaging statements/admissions.
Disclaimer: This answer does not constitute legal advice and does not create an attorney-client relationship. You should not rely on this answer to resolve your particular legal issue, since different laws are applicable in each jurisdiction, and each set of facts are specific to a particular situation. As with any legal question, you should consult with an attorney licensed in the appropriate jurisdiction to evaluate your particular legal problem following a comprehensive consultation and review of all the facts and documents.
The two answers already posted have done a very good job advising you. I just want to clarify one aspect:
A patent owner can be entitled to damages from an accused infringer for infringing activity that occurred before the patent issued and after the LATER of (1) the date the application was officially published by the USPTO, and (2) the date you were first put on notice of the pending application; BUT the patent owner is only entitled to these pre-issuance damages IF the claims in the patent that are being asserted against you are substantially the same as the claims that were published earlier.
It is usually the case that during the course of "prosecution" of the patent application (the process of the application being examined in the patent office and the back-and-forth arguing and amending of the application that results in it ultimately being allowed to issue as a patent) the claims are amended and are no longer exactly the same as when they were first filed or first published. If the claims asserted against you were amended enough to be sustantially different from their original (published) format, the patent owner will not be entitled to pre-issuance damages. Of course, since in your case the patent has not yet issued, you cannot know ahead of time what claims will eventually issue, or even if any will EVER issue. This is why it is so important for you to seek the advice of a qualified attorney NOW.
All three previous answers are spot on. The number one thing you should do is contact a patent attorney to evaluate the pending application and determine the proper response.
Since the legal issues have already been answered (notice and damages), I will add that it has been my experience that sometimes companies and individuals send these letters because (1) they actually believe that a pending application gives them the right to stop somebody from selling a product or (2) they simply want to use the pending application to intimidate others out of the market and not have to rely on the issuance of an application.
Regardless of the reason, a patent attorney can give you an honest assessment of the situation and provide you with a sound approach for moving forward.
Are you sure they aren't just putting you on notice? You cannot sue for patent infringement until you have an issued patent. But damages can accrue from the date a patent application is published in certain limited circumstances. One of the requirements is that the defendant have actual notice. Just because they are not yet able to sue does not mean that you should completely ignore them. You should seek competent counsel and consider requesting a non-infringement opinion, if one can be obtained. You may also want to seek out other companies in your position to pool resources and jointly defend against any lawsuit that is eventually filed.