What Should I Do (best m8 problem)?

If you think this thing with his sister is serious, and you both want to continue hanging out and seeing where things go, you need to tell him. It's not good sneaking around behind his back, he'll be angrier about finding out that you lied to him. Just be honest, tell him what's happened (but don't go into too much detail- so awkward for him) and explain that you don't want it to effect your friendship. I can't tell you how he'll react, and you won't know until you've done it. Honesty is the best policy.