User blog comment:JayeMalik'/Old, New, Underused, Overused RP Locations/@comment-1613839-20180523124502/@comment-1613839-20180524173235

I think the issue with letting students out into Diagon Alley is that they can get out into Muggle London too and cause potential issues. I think the point of them only being able to go to Hogsmeade is that it's an all wizard village so if there's some magic that gets loose from a student it's ok. The other part is keeping track of everyone...if they go out to the only Village for miles they'll have to come back and can't get lost. In London they could and a teacher or even parent finding them could be difficult. It might be the same in this new city (keeping track of everyone) but at least they could use magic to try to locate them.

Just my 2c. I think either might be viable but the above are my thoughts on why they couldn't go to Diagon Alley in the books and why it makes sense to keep it that way.