Is it possible for...

A US citizen applying for a fiancee visa, to be sponsored by their fiancee's parent?

Yes, it's ok.  Curiously and uniquely, the Home Office's site appears to be out of date about it in their IDI's. 

From my site, here's some material...

"...If a rich relation or a benefactor is willing and able to maintain a family in this country so that there is no need to have recourse to public funds, I see no reason in principle why that family should be kept apart.  The purpose of the rules is quite clearly met and the natural meaning of the language used is consistent with the construction I have espoused..."

That's taken from the Adjudicator's commentary on Regina v Secretary of State for the Home Department ex parte Arman Ali[2000] Imm AR 134.  It was a landmark case, and there was a lot of controversy at the time.  I guess the Home Office took it on the chin because they never updated their site.  Strange.

Anyway.  This ruling was further upheld in Amjad Mahmood v ECO Islamabad[2002] UKIAT 01819. 

Ok, I ask this because the form we have here forms questions in a way which seems to relate to your sponsor also being your fiancee... for example:

"Are you and your sponsor related outside of marraige?"

and

"When did your relationship begin with your sponsor?"

These are very difficult questiosn to answer if the sponsor isn't the one that will be married... Is there another form I need for this situation?

These are very difficult questiosn to answer if the sponsor isn't the one that will be married... Is there another form I need for this situation?

For the purposes of the VAF2 form, your fiance is the "sponsor" regardless of who is lined up to help out.  And her parents are the "co-sponsors".  As co-sponsors, they need to clear the finance and acco hurdles that your fiance cannot.  If they prefer, they can make all the requisite disclosures directly to the consulate.  If you need help on that, give me a pm...