Regeneration creates a "shield" of sorts. Whenever a creature would be destroyed and you regenerate it, the shield is destroyed and the creature is tapped and removed from any possible combat. The shield is then gone, and the Elvish Mystic is free to be hit with another Shock , this time killing it without any other regeneration effect.
Note that regeneration does nothing about targeting creatures, only saving them from destruction.
May 31, 2014 7:18 p.m.
Just to clarify one technicality: the regeneration shield is not destroyed. It is consumed. The shield is an intangible status effect kind of thing.
Also, to answer the question in the title, combat is not the whole game. Combat is a phase in the middle of a turn, and it has several steps within it.
May 31, 2014 9:16 p.m.
In addition to that, it should be noted that a creature can be regenerated as many times as you can pay the costs or - like in this case - have the cards for it. That means if he had another Mending Touch (for example), he could've regenerated the creature again.