At the time, Instagram had 80 million users, it had no monetization strategy and was profitless[1]. I suppose this made it seem less of an immediate competitive threat to Facebook's business model, especially with the presence of other smaller photo sharing platforms by Google etc.

In 2020, the Wall Street Journal reported that FTC officials in 2012 had concerns about the deal raising antitrust issues. However, they were apprehensive about potentially losing an antitrust case in court if they sued to block the deal.[2] If they would lose then on the merits of trying to enforce the Clayton Act, it would set a precedent that likely could not be undone.

[1] https://www.ibtimes.co.uk/facebook-instagram-deal-down-747m-...

[2] https://www.wsj.com/articles/tech-ceos-defend-operations-ahe...