Too much speculation and personal opinion

Were there any other mentions of Lugh being a Milletian outside of Tarlach's record? The person who argued against Lugh being a Milletian pointed out that multiple people in G3 refer to the player as "the Knight of Light" as opposed to just Lugh, whom never met Tarlach outside of Morgant form. Although, as I said, somebody calling something one thing and being contradicted later doesn't cancel it out, but earns both mentions a notation. Also, for perspective purposes: a Milletian/Mortal can still become a god... (Mari became a god, and Triona and the Player almost would've became one in G3 and G12.)

"Knight of Light" just means Paladin (in the real sense, as opposed to Emain's paladins). Lugh was simply the first Paladin, before your character even existed, so during G1-G2 that's the only person the NPCs know as the Knight of Light. It's not surprising that G3 would call you that, considering you're a Paladin, then.

And Tarlach's Record is from G3.

That would imply he wrote it before G3, in my mind, but I don't remember what he said about it. It's an irrelevant detail, anyway.