Warning: Since we will be working outside of Banach spaces, one needs to decide the concept of smoothness applied in the following. Since I am citing from Kriegl/Michor's book 1, the default will be the convenient calculus they use (and the results hold for this choice by their proofs).
Sideremark: As the OP only cared for Frechet spaces this choice still coincides with other common choices in the infinite-dimensional setting (for example convenient smooth on Frechet spaces is equivalent to the popular Bastiani setting of smoothness, cf. 2). In particular all convenient smooth maps on Frechet spaces are automatically continuous.
Recall that a Hausdorff locally convex vector space $X$ is called
- smoothly normal, if for two disjoint closed subsets $A_0,A_1$ there exists a smooth function $f\colon X \rightarrow \mathbb{R}$ with $f|_{A_i} = i$ for $i = 0, 1$.
- smoothly paracomopact if every open cover of $X$ admits a subordinate partition of unity whose members are smooth functions.
Obviously, every smoothly paracompact space is smoothly normal.
Concerning the spaces $C^\infty (M)=C^\infty(M,\mathbb{R})$ for a compact smooth manifold $M$, the smooth normality can be deduced from from a Theorem originally due to Wells (1973). Wells gives a criterion for smooth paracompactness (so we shall actually establish the stronger property). I cite it here from 1, where the result we are after is a specialised version of the Theorem 16.10 which I dumb down a bit (it is actually much more versatile, so check it out!) for our purposes:
If $X$ is Lindelöf and smoothly regular, then $X$ is smoothly paracompact. In particular, all nuclear Frechet spaces and strict inductive limits of sequences of such spaces are smoothly paracompact.
Hence it suffices to prove that the space $C^\infty (M)$ is a nuclear space. This is a well known fact for these spaces and can be found at many places in the literature. Viewing the space $C^\infty (M)$ as the space of sections into the trivial vector bundle $M \times \mathbb{R}$, we can cite Proposition 4.8 from another classical book by Peter Michor (also freely available on his webpage here: 3) showing nuclearity.
Upshot: $C^\infty (M)$ is smoothly paracompact, whence smoothly normal, whence the smooth Urysohn Lemma is true.