Isn't there a thread about this already somewhere?
Anyway, I've seen good arguments for both, actually.
The most common argument for Femininity is that "Sheik is Zelda" - which is true, Shiek is Zelda in disguise, but...
Those that argue for Masculinity point out that Hyrule is a magic-world and that Zelda is skilled in magic and could have turned herself into a male, bodyparts and everythng. Common arguments for this view are that the official art of Sheik looks male ("Can Zelda really bind her breasts that flat?") and an insinuation in the OoT manga that a body gender-switch occured, however...
In Super Smash Bros. - in Melee' Sheik is listed as female and the Brawl (unused TP design) is *clearly* female and the creators have stated Sheik as a female character. Yet again.. Super Smash Brothers is not canon for Legend of Zelda, or any of the games which it uses characters from.
So, really, the debate goes on and I feel that both sides have good ammunition.
Now, *personally* (this is strictly personal) I *like* Sheik as a female and whenever the plot of any fanfiction I'm writing or roleplay I'm playing in requires me to write of Sheik, I prefer to make the character female. This has less to do with the eternal debate as it does with seeing a very sexist/offensive comment regarding Zelda on a forum I was browing and just getting so mad about it that I decided to do something of a "literary defiance" in response. (I.E. it's my response to some comment that "Zelda is useless without a ****." To me, NO SHE'S NOT, SO THERE). Feminist ire... though I'm sure the person who made that comment has never seen my fanfics. It's the fact that such thinking is out there that prompts my "I will write Sheik as female for the heck of it" atttidue.