It's quite obvious from the wording of the emails which party is wrong. Your husband handled it gracefully, while her tone was nasty. That leads me to believe that she is definitely a b*tch, as is her pissy little daughter too. I'd completely cut them off. We just did this with my husband's family and it has lifted a huge weight that was on our shoulders and our relationship.

Honestly, it took a long time for me and my husband to realize the way his family abused us. You're better than that. You don't need that. The family you and your husband created is your family now. Your @$$hole sister and her @$$hole kids shouldn't matter anymore if that is how they plan to treat you guys. Maybe keeping your distance shouldn't mean just being in the other room anymore. Maybe you need to take it a step further and just not go to those functions that she will be at anymore. Soon the rest of your family will see through her too (if they don't already) and you'll be invited back to things with the understanding that they no longer invite her. Let her make her own bed. Karma will eventually find her..

Good luck!