Is it obligatory for the questioner to distance himself from his friend who is married to a Woman of the Book, and who has begun to practice his religion more devoutly under the questioner's influence, while his Christian wife tries to cause discord between them and dislikes religion?

You have done well in advising your friend and encouraging him to be upright, which is one of the rights of companionship, and you will receive a great reward for that. Continue to advise him and stay close to him to protect him from tribulations. It is not necessary for this to be in his home; you can meet him anywhere else if visiting his home causes harm. Warn him about the temptation of a woman to his religion, or her effect on his uprightness or on his children, and let him know that he is accountable before Allah.