The source of confusion here, I think, is Doyle's having Holmes say "My ancestors were country squires," as though to assert that his entire lineage consists of country squires. But Holmes may be indulging in the very common human practice of selectively acknowledging his ancestors.
Particularly in a society that weighs patrilineal heritage over matrilineal heritage (because, for example, that is how property—and surnames—tend to be passed down to succeeding generations), it would be natural to think of the line of male predecessors as somehow one's most relevant ancestors—unless someone in the various lines of female antecedents was particularly illustrious.
Holmes seems to have adopted this way of thinking here: He comes from a line of country squires—that is, of men of consequence in the countryside, who presumably (but not necessarily) married women of their own class and rural milieu. Of course, as long as the men remained country squires, it didn't matter much where the women came from, because property normally passed from generation to generation along the male line of succession.
Intruding into this focus on the line of male ancestors comes Holmes's paternal grandmother, a woman who is not only French but the sister of an artist. Obviously, he knows that she is as much a forebear of his as his paternal grandfather is. But in thinking of his line of ancestry, he doesn't seem inclined to credit her, as logic would recommend, with one-fourth of his "blood" (a sort of anticipatory notion to genetic makeup). Instead, she is a kind of foreign complication that alters his inclinations and sensibilities without changing the basic English squireness of his lineage.
That at any rate is my reading of the situation. As many commenters have noted above, there is no question that Doyle intended sister to mean sister, not wife.
