Questions Answered
Zelda is not his sister. Link's father would have been a knight, in order to "keep the bloodline true." For them to be siblings, the queen would have had to have an affair with the knight...but then her escaping to the forest makes absolutely no sense. First of all, she's the queen. Why would she be running out into Hyrule Field in the middle of a war? And if for some strange reason she did, why would she take Link and not Zelda, too? There is no evidence from the game to support the brother/sister hypothesis. Both of them having the same hair color is not much of an argument, considering in real life millions of people share the same eye and hair color, yet are not related.
The sibling conspiracy started earlier than the release of OoT, probably with A Link to the Past in which Link's uncle's dying words are, "Zelda is your..." Many ended that sentence in their heads with "sister," and thus the rumor was born. Arn's dialogue has been corrected in the re-released versions to say, "Your destiny is Zelda." Destiny was the missing word, not sister.
It's not clearly stated that because one is a Sage they cannot marry. I invite you to read Ruto's dialogue before continuing.
Done? Alrighty.
1) Ruto mentions that she wants to grant Link her eternal love, but cannot, because she must stay to guard the Water Temple. Zelda doesn't have a temple. In fact, Zelda is only referred to as the Seventh Sage and is given no element or symbol to associate her with. It is possible that she could be a "Sage of Time," but then that would most likely make her temple the Temple of Time. The Temple of Time has no dungeons and because the Door of Time protects the Master Sword and the Sacred Realm, has no need of anyone staying there to guard it. Zelda is pretty much free to go in and out as she pleases.
2) At the end of the game, Link is sent back seven years, possibly to the time before he and Zelda ever met. For the sake of sanity, pretend you accept the theory that both know what is going to become of them and have enough knowledge to seal Ganondorf in the Sacred Realm before he attacks the castle. (This is the only logical explanation I can give for Zelda being willing to send Link back. If she knew they wouldn't be able to stop Ganondorf before the chaos started, it's unlikely she would have turned back time.) This means that the Sages will be called together while Link and Zelda are still children. If Ganondorf never rises to power, the Sages will never be locked within the temples, there will be no monsters in the temples, and no reason for the Sages to stay there and guard them.
3) If Sages can't marry, then how does Zelda's bloodline continue? If she doesn't have a child, the dynasty will end, meaning most of the Zelda games really shouldn't exist.
I personally don't think a gasp while stepping back in shock is a show of happiness....which is exactly what Link did when Ruto told him they were engaged. Link had no idea that the Zora's Saphire was an engagement ring. So, he really had no say in the matter. Also, when he gets sent back in time, it's to the time before Ganondorf attacks the castle, because Zelda is still in the courtyard. It's possible he and Ruto haven't met yet, meaning he never asked for the stone, meaning they never got "engaged." Link being engaged to Ruto can be classified as in-game humor. In Oracle of Ages, Link becomes engaged to a tree. And, the most intelligent reason of them all... Bad breeding. Mixing Link and Ruto would be like mixing a Goron and a Kokiri. It's not pretty.