Spec shows output will very from 0.1mA to 1mA, you'll have to take that use an op amp like this
http://www.dipmicro.com/store/index.php?act=viewProd&productCode=TLC279IN
to convert it to a 0-5V signal that the arduino can measure.
From Figure 11 the change in current between 0mm and 1mm is quite small.