I fully agree with you i think hitting is unnecessary and teaches a child that hitting is ok . And it is definitely not.
As far as the problem that your wife is having im sorry to say but you are doing all you can really you seem very loving and supportive even though she does things you dont agree with. ( a very very rare commodity these days, hope she knows how lucky she is)But other than that im afraid it is all on her shoulders, she has to be the one to stand up for herself and get a grip on the behavior now before they become teens or they will tear her to pieces. Here is something that i was given to help with my self esteem, it seems a bit silly but it really does work. You and your wife need to sit down and make a list of all her good qualities she posses now, the qualities she would like to have and those that she is going to need, such as (strong, honest, consistent, loving, beautiful, self confident, independent etc...) and what you do with the list is have her stand in font of a mirror and repeat each word like this......" I am _ _ _ _< and put a list word in there) go through the whole list at least twice a day more in the beginning if she has time or is feeling a bit overwhelmed.
The reason this works is, because for every negative thought we have about ourselves or one that someone says to us it takes 3 positives to balance out the negative. So it is just a positive reprogramming, backing up all the good that we all poses. It takes 21 days to get into or out of a habit. so ask her to please do this exercise for 21days and i guarantee that not only your girls will notice a change but everyone will notice there is something different about your wife. Its totally amazing. People dont know what your doing different but like with me i remember pple coming up asking if i had got a hair cut, or changed something but they just couldnt pinpoint it.
Good luck and if you decide to this and remember, will you let me know how the exercise worked?