Sil tension?

SIL AND I HAVE A TENSION THAT I FEEL OTHERS OUR Noticing. She is 33y/o mother of two and has been married for 10 years and I am 26y/o married for two and have known my wife for 9 years. we have always had some sort of attraction but never acted or said anything to each other obviously due to the situation(more on intuition/feel). a couple weeks ago we were on vacation and were sleeping on the same mattress. over the period of that night one thing led to another and I started caressing her lower/upper back, hips, triceps etc. she acted asleep as if nothing was going on as others were in the room. i know she was fully aware because we had made eye contact various times through out the night( SHE COULD LEFT THAT SITUATION). Next day we acted like if nothing ever happened, but i noticed she had made her self up a little more. wearing making when we were going into the pool and always making sure everything was in the right place if you know what i mean. i noticed previous to this incident as well that i would catch her looking at me and when i would turn to look she would turn quickly. we have danced at parties and greeted each other with a little more affection than most would greet with, none of us saying anything and acting cool and collected. i have noticed that she has been dressing a lot nicer when having events at my house and again there is always that tension. i feel as though others are starting to put two and two together. her husband is always hovering around or observing from a distance and my wife asked me "what is wrong that you are acting weird". that same night my SIL
told my wife that she was not happy with here husband and that she should have never married so young. she also told her that she just want to "do her own thing". and that she feels as though she is going through a middle life crisis.

how should i handle this situation.

1� should i confront sister n law and express to her how i would not want to jeoporadize my relationship with her, my wife and the family, and just burst that tension by putting all the cards on the table.

2. act like if nothing ever happened, and see how it plays out.