What I would have honestly expected your sister to say to her when she first brought it up is 'I'm sorry DD, I don't think that's a very good idea. Me and Auntie X couldn't even decide between us who should take the wedding ring, I think it's far too much to ask and would be upsetting for Grandad and Auntie X - who it half belongs to.'
I don't think this would have been the ideal response, unless of course you think your Mum wanted the ring to sit in a box unused by anyone...?
While it might be the easier route just not to talk about it at all, it's not necessarily the right or best route.
Ring - even if you do go on to have children, they're not going to usurp your neice's place as your DM's closest grandchild.
By not discussing this and agreeing to a resolution now, the ring sits in its forlorn box, unused, and a lovely (perfect, even?) opportunity to breathe new life into it is missed.
Life carries on, your DSis eventually passes away, as do you (sorry to be morbid; I just mean as in, the passing of the generations), and the ring eventually makes its way to the very person everyone knew it was going to end up with anyway.
I think thinking about what your Mum would want will lead you to the right decision, and in doing so, between you, your DSis, DN, and DF, you'll be able to create a really special memory for all of you, and it way that makes you all feel good.
I don't think keeping the ring from your DN will ultimately make you feel good.
You seem like a lovely person, and I'm so sorry that this is stirring up emotional memories. 