I certainly understand what you're going through! First I have peanut allergy and can't even smell peanut products with out getting nauseous. My last reaction (someone cooked pasta with peanut oil) landed me in the hospital with severe asthma attack not to mention horrible hives. It is definitely a pain in the neck and the mom is going to have to make sure that anyone who takes care of the child is aware of the allergy. Mostly when the child gets to be of pre-school age and they start making peanut-butter and jelly sandwiches. Nowadays Epipens are carried by the person with the allergy. (have mom as the doctor about how early that can start)
For you (worried aunt) I think this is a good time to re-establish sisterhood with your sister. Maybe you and her can go out alone sometime without the kids. Get to talk to her without all the noise and distraction of the kids - go to dinner or a movie and laugh and talk about the funny things you did as kids. Listen to her concerns and try not to counter what she says. Just learn how to be her friend again. You'd be surprise how much tension between adults is simply caused by the pressure of taking care of kids! It's quite amazing!
And certainly don't let fear rule your thinking. YOU ARE A GREAT AUNT! A good book to read is "Feel the Fear and Do It Anyway" by Susan Jeffers, PH.D. This book helped me in many areas of my life.
Try to think of creative ways that you can caretake so that it is comfortable for you without setting off alarms - I don't know all the details but discuss the actual cartetaking tasks with your sister and see how the adults can share the responsibility around the areas that make you uncomfortable.
When my brother and I both became parents about the same time, there was a degree of tension in our relationship. It took a while but we are great friends now!
Don't despair - write an affirmation statement and read it everyday. Something like, "I am having a wonderful relationship with my sister, my nieces and nephews. We resolve conflict easily and effortlessly and we are happy to be in each other's presence. Any conflict is worked out in calm discussion. The power of my positive thoughts brings peace to those who are thinking of me." carry it with you in your pocketbook!