The High Court said a government ban on non-Muslims using the word was unconstitutional.
The court was ruling on a lawsuit filed by the Herald, a publication of the Catholic Church in Malaysia, in 2007.
The authorities had insisted that Allah in the Malay language refers only to the God in Islam, which could only be used by Muslims.
The BBC's Jennifer Pak in Kuala Lumpur said some Muslim groups suspect the Catholic Church is seeking to encourage Muslims to convert to Christianity - a move which is illegal in Malaysia.
'Glorious new year'
The issue had become a symbol of a growing number of religious grievances among minority groups, in a political environment often divided along racial and religious lines, our correspondent adds.
The Herald filed for a judicial review after it was ordered in 2007 to stop referring to Allah in its publication.
The publication said it had been been using the word for decades, and had a constitutional right to do so.
The Herald welcomed Thursday's ruling, saying it would be a "glorious new year for some 850,000 Catholics in Malaysia".
More than half of Malaysia's population is Muslim but the large Chinese and Indian communities are mainly Christian, Buddhist or Hindu.
+++++++++++++++++++++++++++++++++++++++++++++
Disclaimer
No responsibility or liability shall attach itself to us or to the blogspot ‘Clerical Whispers’ for any or all of the articles placed here.
The placing of an article hereupon does not necessarily imply that we agree or accept the contents of the article as being necessarily factual in theology, dogma or otherwise.
SIC: BBC