Please don't do either of these, you are opening yourself up to liability.
No you're not. Either you're liable before they sent the email or you weren't. Your response to the email (even ignoring it) doesn't change your liability.
And if you believe you're not liable, then ignoring the email may be the very best thing you can do. In fact, responding to it could change your liability whereas ignoring it cannot. The reason being, in responding to it you could admit something that could affect your standing, if what you say could be interpreted to show your intent to use the domain to profit from their trademark, for example.
Usually in life, when somebody says, "I'm gonna sue you", the best thing to do is to ignore it, because if they really were gonna sue you and had a leg to stand on, they wouldn't threaten you, they would just sue. Most of the time when someone threatens you legally it's because they DON'T have a case, yet many people will capitulate to a cease-and-desist letter even if they don't have to.