I say you just tell them both exactly how it is. Obviously, things aren't going to work out to happily ever after with your girlfriend. By telling them, you've opened the situation up to being worked out, whatever way it works out, the sister knows how you feel, and, you get honesty points from everyone involved. Of course, everyone will still be upset, and it will be a big mess, but less so than with any other approach, apart from keeping your feelings hidden and regretting it later in life.