Check the disassembly?

void world_rect(u8 type, u16 rgb, u8 overwrite, u16 x1, u16 y1, u16 x2, u16 y2, touchpad* tp)
{
	u8 check = (type == WORLD_EMPTY) ? WORLD_SCENERY : WORLD_EMPTY;
	u16 x, y;
	u32 xy = x1 + (y1 << WORLD_SHIFT);
	for (y = y1; y < y2; y++)
	{
		for (x = x1; x < x2; x++)
		{
			if (overwrite == 0 || world[xy] == check)
			{
				world[xy] = type;
				touchpadWorld[xy] = tp;
				VRAM_A[xy] = rgb;
			}
			xy++;
		}
		xy += WORLD_WIDTH - x2 + x1;
	}
}

	.global	world_rect
	.code 16
	.thumb_func
	.type	world_rect, %function
world_rect:
.LFB61:
	.file 1 "/Users/phil/Documents/NintendoDS/particles/source/world.c"
	.loc 1 33 0
	push	{r4, r5, r6, r7, lr}
.LCFI0:
	mov	r7, fp
	mov	r6, sl
	mov	r5, r9
	mov	r4, r8
	push	{r4, r5, r6, r7}
.LCFI1:
.LVL0:
	sub	sp, sp, #20
.LCFI2:
	.loc 1 33 0
	str	r1, [sp, #4]
	ldr	r1, [sp, #68]
.LVL1:
	mov	r9, r3
.LVL2:
	str	r1, [r3, #12]
	add	r3, sp, #56
	mov	r8, r2
	ldrh	r2, [r3]
.LVL3:
	add	r3, sp, #60
	ldrh	r3, [r3]
	mov	fp, r0
	mov	sl, r3
	add	r3, sp, #64
	ldrh	r1, [r3]
	.loc 1 34 0
	cmp	r0, #0
	beq	.L2
.LVL4:
	mov	r3, #0
	str	r3, [sp, #8]
.LVL5:
.L4:
	.loc 1 37 0
	cmp	r2, r1
	bcs	.L17
	.loc 1 36 0
	lsl	r3, r2, #8
	add	r3, r3, r9
	mov	ip, r3
.LVL6:
	sub	r1, r1, r2
.LVL7:
	mov	r3, #0
	str	r3, [sp, #12]
	str	r1, [sp]
.LVL8:
.L7:
	.loc 1 39 0
	cmp	r9, sl
	bcs	.L14
	mov	r3, ip
	mov	r1, #208
	lsl	r1, r1, #19
	lsl	r5, r3, #2
	lsl	r3, r3, #1
	add	r4, r3, r1
	mov	r2, sl
	mov	r3, r9
	ldr	r6, .L23
	mov	r1, ip
.LVL9:
	mov	r0, #0
.LVL10:
	sub	r7, r2, r3
	b	.L8
.L22:
	.loc 1 41 0
	ldr	r3, [r6]
	ldr	r2, [sp, #8]
	ldrb	r3, [r3, r1]
	cmp	r3, r2
	beq	.L11
.L12:
	.loc 1 47 0
	add	r3, r0, #1
	lsl	r3, r3, #16
	.loc 1 39 0
	lsl	r2, r7, #16
	.loc 1 47 0
	add	r1, r1, #1
	add	r5, r5, #4
	add	r4, r4, #2
	.loc 1 39 0
	lsr	r0, r3, #16
	cmp	r2, r3
	beq	.L21
.L8:
	.loc 1 41 0
	mov	r2, r8
	cmp	r2, #0
	bne	.L22
.L11:
	.loc 1 43 0
	ldr	r3, [r6]
.LVL11:
	mov	r2, fp
	strb	r2, [r3, r1]
	.loc 1 44 0
	ldr	r3, .L23+4
	ldr	r3, [r3]
	ldr	r2, [r3, #12]
	str	r2, [r3, r5]
	.loc 1 45 0
	mov	r3, sp
	ldrh	r3, [r3, #4]
	strh	r3, [r4]
	b	.L12
.LVL12:
.L21:
	.loc 1 39 0
	sub	r3, r0, #1
	lsl	r3, r3, #16
	lsr	r3, r3, #16
	add	r3, r3, ip
	add	r3, r3, #1
	mov	ip, r3
.LVL13:
.L14:
	ldr	r3, [sp, #12]
	.loc 1 37 0
	ldr	r1, [sp]
.LVL14:
	.loc 1 39 0
	add	r3, r3, #1
	lsl	r3, r3, #16
	.loc 1 37 0
	lsl	r2, r1, #16
	lsr	r1, r3, #16
	str	r1, [sp, #12]
	cmp	r2, r3
	beq	.L17
	.loc 1 49 0
	mov	r2, r9
	mov	r1, sl
	sub	r3, r2, r1
	mov	r2, #128
	lsl	r2, r2, #1
	add	r3, r3, r2
	add	ip, ip, r3
	b	.L7
.LVL15:
.L17:
	.loc 1 51 0
	add	sp, sp, #20
	@ sp needed for prologue
.LVL16:
.LVL17:
.LVL18:
	pop	{r2, r3, r4, r5}
	mov	r8, r2
	mov	r9, r3
	mov	sl, r4
	mov	fp, r5
	pop	{r4, r5, r6, r7}
	pop	{r0}
	bx	r0
.LVL19:
.L2:
	.loc 1 34 0
	mov	r3, #3
	str	r3, [sp, #8]
.LVL20:
	b	.L4
.L24:
	.align	2
.L23:
	.word	world
	.word	touchpadWorld

Software is so complex, and there are so many abstractions between what you intended at the source level and the machine-level instruction sequence plus memory contents, that it's very easy to make a mistake somewhere and misattribute culpability to the compiler. It can and does happen, of course, but 9 times out of 10 the true explanation lies elsewhere - memory corruption, use of undefined variables, pointer aliasing etc etc.

BTW, you've got your calloc() arguments the wrong way round.

Does it matter? Doesn't it just do x * y?