But they shouldn't have.
Yes, it is used in Arab speaking countries, and it is used in Indonesia, and heck, it is even used in East Malaysia. So West Malaysia's unjustifiable claim of exclusivity of "Allah" for Islam is the unreasonable and unreasoning insecurity of small-minded people.
But it is precisely because they are dealing with small-minded people that the Catholics should have given way. What does it matter to refer to God as "Allah" or "Tuhan"? Is God diminished by being translated as "Tuhan" instead of "Allah"?
That said, perhaps the Catholics felt the need to stand their ground in the face of the Islamisation and radicalisation of Malaysian society. They had in fact used "Allah" for many years until an UMNO minister Syed Hamid Albar, chose to make it an issue in 2007.
Like father like son. Syed Hamid Albar is the son of Syed Jafaar Albar (no relations to Jessica Alba), who had tried to incite racial unrest in Singapore, leading up to Singapore's secession (or being kicked out of the Federation of Malaya).