You and your parents are giving her exactly what she wants - attention. Stop!!
Your parents needs to stand up to her and tell her she either gets some help or she gets out.
As for your child, there is no way in h$ll i think they should be at your parents. Your sister isnt stable and who knows what she will do.
I think you need to step back and accept that she doesnt like you or want a relationship with you or your child. It may be hard to face up to but it will take some stress from your life.