c. 1300, nece, "daughter of one's brother or sister; granddaughter; female relative," from Old French niece "niece; granddaughter" (12c., Modern French nièce), earlier niepce, from Latin neptia (also source of Portuguese neta, Spanish nieta), a more decidedly feminine form of neptis "granddaughter," in Late Latin "niece," fem. of nepos "grandson, nephew" (see nephew). Cognate with Old Lithuanian neptė, Sanskrit naptih "granddaughter;" Czech net, Old Irish necht, Welsh nith, German Nichte "niece." 

It replaced Old English nift, from Proto-Germanic *neftiz, from the same PIE root (Old English also used broðordohter and nefene). Until c. 1600 in English, niece also commonly meant "a granddaughter" or any remote female descendant or kinswoman.

consonantal digraph now in English usually representing the sound of -f-, originally it was the combination used by Romans to represent Greek letter phi (cognate with Sanskrit -bh-, Germanic -b-), which at first was an aspirated "p," later probably the same sound as German -pf-. But by 2c. B.C.E. had become a simple sound made by blowing through the lips (bilabial spirant).

Roman "f," like modern English "f," was dentilabial; by c. 400, however, the sounds had become identical and in some Romanic languages (Italian, Spanish), -ph- regularly was replaced by -f-. This tendency took hold in Old French and Middle English, but with the revival of classical learning the older words subsequently were altered back to -ph- (except fancy and fantastic), and due to overcorrection in this some non-Greek words in -f- began to appear confusedly in -ph-, though these forms generally have not survived (nephew is an exception). The modern slang fad for replacing f- with ph- (as in phat) seems to date to the 1960s and phone phreak (see phreak), where it might have been suggested by the spelling of (tele)phone.