In Hindi (and Nepali), the word is spelled as
kaTaar (see
transcription key), and seems to derive from (an unattested) Old Indo-Aryan/'Sanskrit' word
*karttaara-. It seems to simply mean 'knife, dagger'. The root it derives from ultimately means 'to cut', and there are other related words with meanings like 'scissors' (e.g. Hindi
kaatii 'goldsmith's scissors', Assamese
kaatii 'scissors'). It's a bit strange that it's from a root of 'to cut', since I don't think of katars as generally being much use in cutting, but the sense may have generalised to 'knife', and then been applied to anything knife-like.
I think 'katara' is a red-herring. The devanagari orthography used for languages like Hindi, Nepali is a bit ambiguous in a few cases. The spelling
kaTaar could in theory be pronounced either as
kaTaar or
kaTaara, and certainly in transcription might often be represented as 'katara'.
In any case, 'katar' could not be a diminuitive of 'katara' as far as I know, as Indo-Aryan diminuitives are actually formed by additional suffixes, or by changing vowels (usually
-aa to
-ii, i.e. masculine to feminine - e.g. Hindi
rassaa 'rope',
rassii 'string'). In other words the diminuitive of
*karttaara is
*karttaarii, and it is from this latter (diminuitive) root that words for 'scissors' are formed: e.g. Assamese
kaatii (cited above), Gujarati
kaat,
kaatar 'scissors', etc.
So I don't know if 'katar' is correctly applied to the type of weapon it is often applied to in the West. My Hindi dictionary simply defines
kaTaar as 'a dagger'. It seems it could be a case of overspecialisation of a term due to a misunderstanding by a Westerner. A bit like if someone pointed at a table knife and asked 'what's that called in English' and was told 'knife', but then restricted the meaning of 'knife' only to table-knives.
That said, the phrase
kaTaar utaarnaa means in Hindi 'to stab with a dagger', which recalls the normal use of a katar. So perhaps the term became specialised indigenously and isn't just a European mistake. (plus a word can of course be used in both specialised and non-specialised ways, e.g. my wife, who is Nepalese, can use the term 'khukuri' to apply specifically to khukuris, but on occasion also just uses it to mean '(sharp) knife' in general).