Long answer:
Possibilities:
Make it illegal: This will most likely turn bitcoin into what they are afraid it will be. If use of bitcoin is made illegal we cannot use it for personal or business use, and those who would use it for illegal reasons, trafficking in illegal goods and money laundering would still use it and would be the sum of the bitcoin economy.
Regulate it (end point taxation, quotas, or caps): This is the best action of the government we can hope for. The government will act, and this is what economists will tell them to do. End point taxation will be hard to enforce but would be just has hard to enforce as full illegality: it would allow government control, yield revenue versus lose it and give everybody what they want. This is the compromise position.
Ignore it (How things are now, but not going to stay this way): The government will ignore bitcoin until it causes a problem. A problem means in this case, that they are up for re-election and their constituents care about it or the credit card companies/banks get worried and send in their lobbyists. Neither of these things will happen until somebody makes an easy to use consumer facing product that allows easy use of bitcoin in everyday life that can challenge any established product (this is surely already happening).
Right now there is a lot of clamor and potential. Nobody is going to move in the legislature (the judiciary's hands are tied until somebody gets sued and the executive tends to stay out of this stuff until one of the other two sets the rules) until a real incident has happened with bitcoin. i.e. somebody is caught using it to launder money for something publicly inflammatory or some startup comes up with a great way to sell it to the consumer masses.
Not very useful for money laundering if it is not very useful for non-criminal transactions.
First, Bitcoin isn't actually decentralized. It's not a true open-source community of developers; the core group is tiny, and few others are knowledgeable about the protocol, which is poorly documented. Remove the mainline client and you'd destroy Bitcoin. The exchanges are hugely centralized. Exceedingly few people use Bitcoin for anything else other than buying and selling dollars, and there's only one place to do that in any volume - an unregulated Japanese exchange of questionable legality.
Second, Bitcoin is extremely vulnerable to denial-of-service attacks, both network-based (even the original developers were aware of this) and as a result of the higher-level Bitcoin protocol itself. The best analyst on these matters, someone using the label "ComputerScientist" at, among other places, Ben Laurie's blog (links.org) estimated that it would cost less than $1 million to topple the system without even any cleverness - just by obtaining a majority of the "legitimate" hashing power of the network.
Third, though this is more speculative, most people don't like to engage in financial crime; it's not psychologically the same thing as downloading a CD or a television show. Nobody thinks they're supporting significantly illicit activity by downloading some music that otherwise would have cost them $7. People can be easily persuaded -- rightly -- that they're supporting money laundering, significantly illegal and immoral purchases, and so on using Bitcoin. Indeed, because Bitcoin is essentially unneeded for legitimate transactions (and probably can't compete in the long term on transaction fees with other legitimate payments systems), its primary use aside from speculation is currently illegal activity, and there's no reason to think that will change.