"To start WW3 with my SIL"
Really, OP? You do know that will harm your relationship with your brother, your mother, your niece? Is that what you want?
"The fact that me and my husband cant remember what offended her so much to cause an atmosphere and leave the room shows it wasnt the a big deal. If he had said something horrible to my neice id have said something to her. I love my neice. I only knew because my mum told my husband to apologise. So we went home and were raging."
So "it wasnt the a big deal" - to you. It was a big deal to your mother. It may have been a big deal to your brother's wife. In my opinion, that means it was a big deal, and you are minimising the offence your husband caused.
"I was fine with my brother he didn't even know until I said about sorting Easter plans to avoid a clash that we weren't talking to his wife. "
This in interesting to me. There's you and your husband, who were "raging" at being told by your mother to apologise, on your high horses and not talking to your brother's wife - and your brother was unaware of all this drama until you told him.
Two possibilities - either your brother's wife WAS aware you and your husband were sulking at being pulled up, and chose not to inform her husband of your behaviour, or, your brother's wife WAS NOT aware you and your husband were sulking at being pulled up, because you're not really a presence in her life and you and she don't talk that often anyway. Either way, it's you stirring this pot, not her.
But, to the meat of your complaint against her:
"My SIL has told one of the mums that she knows through work about my husbands past."
"I dont think it matters the conviction it was a very long time ago and he did his time and rehabilitated and is a good member of society."
"the mums have found the news paper about what he did ( over q5 years ago)"
Who told you that SIL told them this? Or did you just make an assumption? It was in the newspaper, why do you think that's not the original source of the information? Why would SIL know about his past "through work" and not through being a member of the same family? Have you leapt to a conclusion that she is the source because of her job?
Actually, I've just realised - this is a new husband, isn't it? Not the father of your children, but someone that you have met after he came out of prison for whatever he did. Otherwise, SIL would have known about his past because she and he would have been in-laws when he was in jail and you wouldn't be claiming SIL "told one of the mums that she knows through work about my husbands past", would you? And given that you have minimised the offence your husband caused with his comment to your niece (how old is she?) I'm wondering if you're minimising the offence your husband was jailed for. Because it's an offence the school mums take seriously, even if you don't.
"Shes calculated this just to get own back. If she is allowed to strop off im allowed to avoid feeling uncomfortable again by not seeing her. I will just see my brother and neice and nephew without her."
You are ascribing all sorts of motivations to her, aren't you? She didn't leave the room because she was uncomfortable, she "sulked off". She's getting her own back, even though I personally doubt she's mentioned your husband to the school mums. You are reading too much into it. You really want to be the victim of this don't you?
And as for seeing your brother and niece without her - I think your brother might have something to say about that. It's in your OP - "He asked why I said because your wife is a toddler sulking off and we don't want to see her again. Hears nothing more from my brother." You've heard nothing more from your brother since you had a go at his wife to him. Wife or sister, who will he pick? I expect he's picked wife, rather than his flouncing sister with the new husband she defends so vehemently.