I really do not think that athletics have anything to do with it, though I think maybe participating in competitive activities may help kids prepare for life. I graduated high school with highest distinction, was 10th out of 511 and did not participate in ANY sports. I'm just not very coordinated, but I did keep active by running or doing workout videos. I did, however, participate in drama, Latin Club, Spell Bowl, debate, Drama Club, NHS and Mock Trial, and I had a 30 hour a week job the last two years so I was very busy. Many of my friends who had similar academic standings also had many extracurriculars and a job or even two, just no sports. Our valedictorian did not play any team sports and actually didn't participate in any clubs, either. Nor did she have a job. I also know people who, growing up, were forced to play at least one sport at any given time. Well, guess what? Now they're the ones sitting on the couch and I'm the one who still works out.
Ultimately, I think it's a decision that should be made between you, your husband and your daughter. Your neighbors and friends shouldn't really get a say. Just remind them there are many other worthwhile ways to keep busy.
Updated
Sorry, I just read your "what happened." I'm glad the hubby relented and you worked it out with your daughter. I also want to add in that in high school and college, I spent a fair amount of time tutoring athletes, so that alone proves sports does not equal being smarter.