The government says the word refers only to the Muslim God and its use by Christians might confuse Muslims.
It has threatened to revoke the paper's publishing licence if it defies the order.
The Herald also wants a court declaration that 'Allah' is not for the exclusive use of Muslims.
Father Lawrence Andrew, editor of The Herald, welcomed the court's decision.
'I am very pleased that we can now proceed. We will see what will happen at the next stage,' he told reporters.
The court will set a trial date later, said Mr Derek Fernandez, a lawyer for the paper.
The Herald - which publishes in the English, Malay, Mandarin and Tamil languages - insists that 'Allah' is an Arabic word that predates Islam and has been used for centuries to mean 'God' in Malay.
The case is an example of Malaysian religious minorities' increasing complaints that their rights have been undermined by government efforts to bolster the status of Islam, Malaysia's official religion.
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