The decision reversed a 2009 lower court ruling that found unconstitutional a government ban on the use of "Allah" by the church's newspaper, The Wall Street Journal reported.
A three-judge panel ruled Monday "the usage of the name 'Allah' is not an integral part of the faith and practice of Christianity."
"I am not discouraged, but dismayed and disappointed that a judgment [could] be made in a manner where the usage of 'Allah' is allowed in the Malay-language Bible but for the weekly [publication] it is prevented," said the Rev. Lawrence Andrew, editor of the Herald, the newspaper at the center of the controversy.
The newspaper plans to appeal the ruling to Malaysia's highest court, the Federal Court.
In arguments before the court last week, the Catholic church said the Malay-speaking Christian community had used the word for centuries to refer to God.
Government attorneys told the court then-Home Minister Syed Hamid Albar had issued the ban in 2007 to maintain security and public order. They also said "Allah" was specific to Muslims.
The decision raised concerns about the religious freedom of minorities.
Viola De Cruz, president of the Catholic Lawyers Society, said, "this decision affects fundamental religious rights of the minorities in Malaysia."
Ibrahim Ali, president of Malay rights group Perkasa, supported the ruling, saying it was in line with the country's constitution and could ease rising negative attitudes toward the Catholic church.
"This is not a victory for the Muslims against the Christians [as the] Christians are also citizens of this country," he said.
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