No, a 2nd or even 3rd or 4th counter offer to the original is not illegal. If I understand what happened correctly, your 1st offer was rejected outright and the sellers did not choose to counter your first offer? If so, your agent would have to write a new offer. It sounds to me like your agent is doing everything exactly right, you just need to up your offer price, because the sellers rejected the first offer. Oh and trust me, I have seen and heard of deals going out the window for as little as $3,000 difference in price. The sellers are tired of being beat up on prices and the buyers are still thinking they are going to get a good deal for nothing. (not necessarily saying that is your case, just in general) Good luck with it!
The line of offers and counter offers is a bit confusing from your description, but the law as it relates to agency duties in Indiana is not. The law makes it very clear what an agent's duties are to his or her client.
1. Obedience - do what you say
2. Loyalty - loyal to you exclusively
3. Disclosure - tell you about issues with the property that they're aware of
4. Confidentiality - don't tell anyone anything that might compromise your negotiating position without your written permission.
5. Accountability - make sure you know where the money's going and how it's disbursed.
6. Reasonable care - be careful with how he or she deals in the transaction.
Unless and until your agent has failed to do one of those 6 things, they're operating according to the Indiana Real Estate License Law's requirements as an agent.
(By the way, I am not an attorney. Take my opinions as such.)
Good luck, and I hope your deal works out!
Principal Broker, REALTOR®
MacDuff Realty Group