Today in one of our games we had an interesting situation, my oppo played Game of Cyvasse and knelt a 3 STR char, I had Acolyte of Flame in play so does her STR count as 2 or 3 for purpose of the event?

Someone else may correct me, but my impression would be that as soon as she kneels she will lose the bonus STR and be counted as a STR 2 character.

Correct. The STR is counted/compared after the kneeling is complete (ie, "Then, the player who knelt the character with the highest STR..."). So bonuses related to standing (like the Acolyte or King's Pavilion) would not be applied.