The fact that they have refused your visa is because you have applied in country without a legal leave to remain. This does not breach your Human Rights because the UKBA has argued that you can return to your home country and make the application from there - they will then consider the application and therefore your human rights are not breached.
When you apply for the spouses visa out of country the UKBA aims to reach a decision on it within 6-8 weeks, although this is an aim and not a binding obligation and it does on occasion take longer than this.
An application arguing that your human rights are breached in the case of your spouses visa application would not be successful and you would still be faced with the prospect of having to return home as above.
An application based on the fact that your children are here would be a discretionary application, rather than a traditional application. It would be complicated and expensive (you would need to instruct a solicitor) with no guarantee of success and certainly less likely to succeed compared to an out of country application for a spouses visa provided that application does not have any defects other than the overstay.
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