There are some residency period requirements in the US for a US Citizen to fullfill, but generally if your Nephew/Niece was born after he obtained his Citizenship then the Children are US Citizens.
Not only that but she can pursue to get Child Support from the Father if she is not getting it already from different agencies without getting a attorney and when the Children turn 21 they can sponsor your sister for a Green Card.
Your Sister should contact the closest US Embassy to start the process.
Here is the link you might want to read the exact law.
http://travel.state.gov/law/info/info_609.html
The Children are US Citizens.