The New World was raised from the sea by the god Hawklin during the First War, and was protected by Hawklin's barrier, which prevented anything demonic from entering the New World by any means (including summoning, gating, and other methods). This was circumvented when a lich allied himself with the demons, and delivered a message from the demons to a group of Belenians (a human subrace), who agreed to a pact that would enhance their power through demonic strength. These became the tieflings.
The whole point of creating the tieflings was to get some demonic power through the barrier, which acted like a foot in the door, allowing the demon hordes through, and beginning the Second War. This is actually very similar to how the dragonborn were created during my last campaign, taking on draconic power to allow one of the original 5 dragons aspects into the world in order to combat the demons.
The Second War ended when a few of the mortal nations got together and errected a new barrier, which could function even with tiefling presence. It's not perfect, though. Some lower ranks of demons can still be summoned through the barrier, and more than one mid-rank demon has been found in the New World, indicating that either the barrier is weakening, or someone has found a way through it. That mystery has yet to be solved.
Why didn't they just kill all the Tieflings during/after the Second War? Since back then the race was 100% evil (or at least dangerously stupid).
My current characters:
Lawful Good Dragonborn Cleric: Would strongly argue against it, argue for other options, and would actively work against the NPC (if he didn't listen to reason).
Lawful Evil Changeling Psion: Out loud/to the party: [Insert various logical arguments for immediate genocide] along with high diplomacy rolls.
Telepathically to the NPC: "I can telepathically tell the king what you're up to before your henchmen move an inch, you better make this worth my while or else."
If the NPC makes an acceptable offer, then actively work to kill the tieflings (unless the characters/players are squeamish and then just allow it to happen). If one ally absolutely refuses to turn a blind eye, gogo Faulty Memory. If more than one refuse, secretly work with the NPC. If the offer isn't acceptable, change to 'we'll pretend to ally with him to find out his plan' and then turn him in to the King.
Myself: I'd personally try to get him to wait until we tried other options, and if there weren't any at all, I'd probably turn a blind eye to the genocide.
Hope you let us know what your players decide.