Werewolves in Tolkien: Why is this name used?

I very much doubt that Tolkien cared greatly about modern ideas of werewolves and especially gaming, comic-book and movie notions of what werewolves are. (If for no other reason than that they hadn't been invented yet!)

Older traditions about the supernatural are much less precise and consistent than modern. The ancient traditions were rarely codified and rarely self-consistant. E.g., the modern notions of the Norse gods are a modern systematizing of stories which themselves were mostly codified and written down by Icelandic Christian scholars who tried to make sense of stories several centuries after they were actually living stories. (And even in a single work such as the Prose Edda, there are still pretty basic contradictions between the stories.) Further, what other fragmentary information we have about the sources shows huge regional and temporal variations in things as basic as the powers and personalities of gods like Odin and Thor.

Werewolves in history are also not so simple as modern tidying would lead you to believe. (For example wolf-riders in some areas seem to have been called werewolves.) Tolkien was a scholar of and was steeped in the older stories. He would have cared little if his werewolves owed nothing to, say, Lon Chaney.

Let's look at his usage, where we see "wargs," "werewolves," and "wolves".

There were no wargs named as such in Silmarillion, and the werewolves seem to be quasi-demonic wolves. I say "quasi-demonic" because they are described as wolves with a rather nasty affect:

From time to time they saw two eyes kindled in the dark, and a werewolf devoured one of the companions;

Tolkien seems to make no real distinction between a wolf and a werewolf:

But when the wolf came for Beren, Felagund put forth all his power, and burst his bonds; and he wrestled with the werewolf, and slew it with his hands and teeth;

In fact, they are said to be wolves possessed by evil spirits:

Sauron brought werewolves, fell beasts inhabited by dreadful spirits that he had imprisoned in their bodies.

The only instances of shapeshifting involving werewolves are when Sauron and Beren turn themselves into werewolves, Beren using a shape-shifting skin, the "Hame of Draugluin", Draugluin being

a dread beast, old in evil lord and sire of the werewolves of Angband

In LotR, wargs and werewolves are listed among the servants of Sauron. (This is the only mention of werewolves.) This can be taken as evidence that they are different, but Tolkien also lists orcs and goblins (which aren't different in kind) in the same way.

Based on their behavior, wargs appear to be unusually intelligent wolves, but not necessarily of human intelligence.

Bottom line:

(a) These creatures (whatever they are) play a very, very minor role in the stories and it's not clear that Tolkien really thought deeply about them.

(b) This was written before the modern zest for systematizing magic: the uncanny and the supernatural was dominant.

(c) Tolkien was well aware of the vagaries of myth and legend and probably wasn't greatly troubled by it -- at least when it wasn't part of his own legendarium.

The Oxford English Dictionary provides an obsolete definition of werewolf as

also, an exceptionally large and ferocious wolf.

It is almost certainly this definition that Tolkien had in mind, despite any more modern meaning of the word.

The OED also casts doubt on the analysis of werewulf as being a compound of Old English wer ("man") and wulf ("wolf"), due (for example) to variants of the word starting with war- and var- instead.