I think some kids get sick of the constant work required to be good at a particular sport, and others get stressed out over the increasing difficulty. You say your niece is afraid of the next level, and she could also be stressed out about the competition level.
At 12, I think it's okay to have them finish the term that's been paid for on the theory that they asked to join (rather than were forced by a parent). But if she's tired of it, what's the risk in having her quit? If she misses it and is miserable, why can't she go back at some point? Adults take vacations, teachers take sabbaticals, kids can take a hiatus.
Let her take a season and not do an organized sport. If she's a natural athlete, she may find something else. For example, some of the gymnasts in my son's high school did a season with track and field, discovering that their abilities made them good at hurdles, high jump and even pole vault (although a child who, right now, is afraid of the aerial stuff might not do pole vault!). But maybe something where she can see the obstacle (jumps, steeplechase, etc.) would be better. But that's all high school. Right now, she's in middle school, but maybe there's a cross country team where she can just run, stay in shape, and compete against her own personal record and the clock. A lot of kids in our town use XC and track to stay in shape for another sport, or find out they love it for its own sake.
Meantime, maybe she'd have a wonderful time in the drama club, the chorus, a dance group, French club, the community service club, the town recreation basketball program, etc. But I think giving her a few months off with nothing structured and nothing organized is really okay. Let her see what her friends are doing, let her just go hang out at another activity to explore gently with no pressure to sign up or commit.
My son didn't have anything in particular that he loved doing until high school, when he wandered over to the track team. He did a season or two of soccer, 2 of basketball (in the town rec programs), and spent a lot of time in neighborhood play dates and some independent growth opportunities (nature hikes, outdoor science experiments, building projects, and more). I think it helped him develop a wide range of interests.
My niece, by contrast, was pretty much forced into swimming because she was excellent at it and was in demand from the team as well as pushed by her parents. She did nothing but practice and spend every weekend in endless meets (huge teams = lots of heats = lots of waiting time). She finally maxed out of it and hasn't swum since, and has turned into a huge party girl. I think being forced into something kept her from finding herself.
A lot of parents really push their children to be experts at SOMETHING under the mistaken idea that it will help them get into college. Nonsense! Colleges don't just want the top debater, the top soccer player, the top math team whiz. They don't want someone who had a structured activity every single day on top of advanced placement classes and the Nobel Peace Prize. They want kids who explore, who are well-rounded, who adjust well to different experiences and challenges, and who know who they are so they can separate from their parents and their hometown environment, enjoy a lot of different people from different backgrounds, and rise to a variety of challenges.
Your niece is 12. If she were mine, I'd tell my sister to leave her alone. Short of spending all day watching TV and texting, it's okay for a 12 year old to be unsure of all of her interests and to take some time to find something she loves.