Why didn't government regulators prevent MH17 from flying the route it took?
The Airlines can decide for them selves which route to take, however the government has an intelligence operation which can predict events that might happen in political unstable regions of the world. However in the case of MH17 it was not the "army" that shot down a plane but an conflict between rebels and the government.

Routes flown to Kuala Lumpur

While the flight from Amsterdam to Kuala Lumpur from Malaysia airlines have been suspended, one can still retrieve the route flown via flightaware.com:

The KLM flightpath (KL809) 10246km:


The Malaysia Airlines flightpath (MH19) 10855km:


From the plots it can be seen that both Airlines diverted their routes after the accident with MH17. They both avoid Ukrainian airspace.

Would flying these routes prevented the accident? Yes, but at the time intelligence agencies where not aware that the Separatists had acces to such advanced surface-to-air missiles. This also because the nature of the conflict would not suggest that such weapons would be required.