Is peer-reviewing a manuscript by a coauthor of yours truly ethical?
When you are being asked to peer-review a paper authored by somebody you have collaborated with (or are collaborating with), you should be aware that you are on a slippery slope.

The very least you should do is:


Ask your self the question whether you think that you can provide an objective and unbiased review.
To inform the editor (or whoever invited you) about this.


There are situations where it might be acceptable, and situations where it is not. It is certainly not acceptable when you have a clear interest in the outcome of the review process (think of reviewing a grant application, where you would be benefiting somehow).
From the other hand, when you are (one of) the clear expert on a certain topic, and had only a superficial collaboration with the authors, it might be acceptable (in some narrow fields it might be kind of unavoidable).