The Collaborative International Dictionary of English v.0.48:

Niece \Niece\ (n[=e]s), n. [OE. nece, F. ni[`e]ce, LL. neptia,
   for L. neptis a granddaughter, niece, akin to nepos. See
   Nephew.]
   1. A relative, in general; especially, a descendant, whether
      male or female; a granddaughter or a grandson. [Obs.] --B.
      Jonson. Wyclif. Shak.
      [1913 Webster]

   2. Especially: A daughter of one's brother or sister, or of
      one's brother-in-law or sister-in-law. In modern English,
      this is the primary meaning.
      [1913 Webster]

WordNet (r) 3.0 (2006):

niece
    n 1: a daughter of your brother or sister [ant: nephew]