Yes, you do have to let this go and have your own relationship with your parents and let them be the grandparents they are to your own kids. My family had a similar situation.
Understand that your nephew is more than a grandson to them, they have been involved (it sounds like) more as 2nd parents than grandparents. That is just because of the situation that was presented to them - your sister being a single parent and needing help. Thank goodness your parents were there. You did not need that kind of help for your children, thank goodness.
So, do not compare and feel bad or let your children feel that you think they are thought less of. Because you and your DH have been parents, the grandparents have not had to fulfill that role. They are being grandparents to your children, not parents.
How to deal with your daughter's upset? First of all accept that the situation is the way it is, then you can be "matter of fact" with your girls. Until you let go of your own anger, your children will pick up on it.
As far as the spoiling, again, think of it as another parent's choice. You can see that it is not good for the child, but you cannot change others. My answer to my children was, "that's not how WE do it."
So, do see this in a new perspective, your children will not ever be in the same category as your nephew, nor do you really want them to be. You should try to understand that even though they have gone overboard in spoiling that little boy, your parents intentions have been to help a child that needs them.
I hope this helps you to let go of the anger and resentment and accept things for what they are. Just see what your family dynamics are and learn to accept the situation. Remember your nephew needs your love and acceptance also.