BDSM reaches places we have closed off from the world. Some have good feelings in them that we had shut away because we thought they were forbidden, some hold toxic waste.

But getting toxic waste out is good, if you take proper HazMat precautions. As they say in re-evaluation counselling, the discharge is not the distress: crying and curling up, if they're not a sign you are doing something obviously wrong at that moment (which you weren't), are probably a healing process at work.

You may understandably not want to switch gears from fun to therapy in the middle of a scene. But if I were you, I would set up some sessions where you intentionally do the things that have triggered this discharge, and be ready to give her support and validation - "It's OK to cry, I'm with you, let it happen".

Even if she can't find what she's crying about, it's still good for her. But better still if she can work her way back to the cause, and a simple effective tool is to ask "When's the earliest time you remember feeling like this?" It won't be the original cause, but exploring it will probably bring up older memories to work on.

So to answer your questions:
1) Discharge of repressed emotions which the situation has restimulated. (Probably not something as simple as a childhood spanking - that would only have created such a deep distress if there had been strong pressures on her at the time not to discharge her feelings naturally with a good howl.)
2) Good in the long run, if you work with it and help her get rid of this old pain. As well as being a proper expression of a Dom's responsibility, it's a powerful bonding experience.
3) See above, or any good text on co-counselling and similar therapies.