Any fires started in Minecraft will only continue to grow only as the world is actively running. So if you set your older sister's house on fire & quit the game, the state of the fire will be saved when you quit & will only resume when somebody else loads up that world.
If you played on a server (which is only available on the PC version instead of the XBLA version), the world would keep going as it would be active on a separate location.
With that said... I can't support going to war in Minecraft, mostly because you're deal with semi-limited resources (you'll more likely run into HDD space issues before you can render the world completely) & you're more likely going to destroy the world to the point that you can't do all the fun stuff... where you'll delete the old world & start all over anew.
I don't know exactly why your younger sister was hoarding iron (possibly for a project of something); Don't follow the cycle of grief here... if your older sister is being a troll, the best course of action is NOT TO PLAY HER GAME. Start up a new world of your own & tell her that you don't want her to play in your world because of her actions.
I will note that when the XBLA version gets out of beta (as it's currently in 1.7.3 beta), more resources will become semi-renewable (like iron ingots from mob drops)... once the XBLA version reaches the 1.3 era, a fair amount of resources will become semi-renewable (even diamond).
However, once you hit 1.0, you'll be able to play in creative mode instead of just survival.
Hope this helps!