The kingdom's security forces also raided the home of a top Shia cleric and arrested a number of people.
Bahraini police opened fire on Tuesday on a protest by supporters of a top Shia cleric, with at least one demonstrator reported dead in the latest unrest to hit the Sunni-ruled Gulf state.
The Britain-based Bahrain Institute for Rights and Democracy (BIRD) said a protester had died in the incident in Diraz, the scene of a long-running sit-in outside the home of cleric Isa Qassim, who is considered the spiritual leader of Bahrain's majority Shia community.
Eyewitnesses say multiple civilians were wounded when police opened fire at demonstrators throwing stones and Molotov cocktails at security forces.
Bahraini security forces also raided the home of Qassim and arrested a number of people, activists and a security official said.
"The operation in Diraz was based on intel that several fugitives connected to serious acts of terrorism and the killing of a policeman were harboured in the village," a security official said.
Police arrested several people wanted by the authorities, the interior ministry said.
Unrest since 2011
The kingdom has seen sporadic unrest since 2011, when local authorities backed by a Saudi military force crushed Shia-led protests demanding a constitutional monarchy and an elected prime minister.
Authorities on Sunday sentenced Qassim to a suspended one-year jail term for illegal fundraising and money laundering. He stands accused of serving "foreign interests" and promoting "sectarianism and violence."
A court last year stripped him of his citizenship, sparking repeated sit-ins outside his residence in Diraz.
Bahraini authorities have accused Iran of fomenting unrest in the kingdom, ruled for more than two centuries by the Sunni Al Khalifa dynasty. Tehran has consistently denied involvement.
The government's clampdown on dissent has drawn harsh condemnation from international rights groups and governments.
US policy shift
The tiny Gulf state is a key regional ally of the United States and is home to its Fifth Fleet. But the administration of former president Barack Obama frequently scolded Bahrain over rights concerns.
In a meeting with its King Hamad in Saudi Arabia at the weekend, US President Donald Trump made a clear break from previous US policy.
Trump told Bahrain's king on Sunday it was "a great honour to be with you" and said there "has been a little strain but there won't be strain with this administration."
Bahrain has imprisoned dozens of Shias accused of taking part in demonstrations and stripped at least 316 Bahrainis of their nationality since 2012, according to Amnesty International.
Bahrain's parliament in March voted unanimously to grant military courts the right to try civilians charged with any act of "terrorism."
Rights activists fear Qassim could be among the first to face court-martial.