I do think what your MIL did is sexual assault, and I do think you you were right to react how you did, and I do think your wife reaction was completely inappropriate.

However, I agree with the above commenter, that your wife is not beyond redemption... yet - use the advice of the top comment, and ask her how she would feel about your dad grabbing her crotch, hopefully this puts it into perspective for her. Furthermore, make sure she has your back if it happens again, if she can (1) finally see your side more cleary (2) stand up for in the future (3) condemns her mother for these actions, than I dont this is divorce worthy

And before you repeat your comment - I'm a male who has been sexually assaulted before.