Because the engine prefers the longest match that starts at the leftmost possible position. When it hits .*, it jumps all the way to the end of the string and then backtracks, trying to match the next necessary character. Because it's backtracking, it matches </tag> at the end of the string. That fits the pattern, so it doesn't continue backtracking to find a shorter match.

If, when creating the example string, I carraige return after the <\/tag>, there shouldn't be a whitespace to match on, right?

The /s flag allows the '.' token to match newlines. Adding the minimal token '?' avoids the jump-to-end-then-backtrack behavior. It works like you'd expect, trying to match as few characters as possible.

Does that clear it up? I've also touched up the formatting somewhat.