Thanks for all the great ideas and advice, very helpful. Mike, that was particularly helpful to know that removing the sill would require taking off all the window casing, though we had pretty much decided on working on it in place anyway.
We just picked up the faucet this afternoon (wife looked long and hard for it, so changing isn't looking like an option). Besides the tubular column of the faucet hitting the windowsill, there is also an issue that the single-arm water control lever (on-off, hot-cold) extends out to the side right at the windowsill level. So we're looking at a straight-sided notch rather than a round notch. Too bad, because I too had ideas of hole saws or forstner bits.
As mentioned, there is no shortage of saw options in our shop, both hand and powered. A mini-router would be nifty, but unfortunately I don't have anything midway between my Porter Cable 690 and a Dremel. Coping, saber or jig saws all seem like reasonable options. Though I once bought an oscillating multi-tool I don't use it often enough to be good at it.