All perfect praise be to Allaah, The Lord of the Worlds. I testify that there is none worthy of worship except Allaah, and that Muhammad is His slave and Messenger. We ask Allaah to exalt his mention as well as that of his family and all his companions.
He is obliged to immediately separate with his sister, and the matter does not need divorce. As regards the children, they will be traced back to him (the father) if he had married his sister believing that this marriage is correct, like the Magi who believe that marrying Mahaarim (non-marriageable relatives) is permissible, otherwise they will be treated as children resulting from an illicit relation and they will be traced back to their mother.
Allaah Knows best.