Protestors have blocked a main thoroughfare to Bahrain Financial Harbour, a major business district.
In one of the most violent confrontations since troops opened fire on protestors last month, youths erected barricades across the highway after overwhelming riot police near the Pearl roundabout, the focal point of weeks of demonstrations.
A protestor said 'investment in Bahrain is for everyone not just one person, it is not about Sunnis and Shias.'
One demonstrator showed a round red mark on his chest, which he said was from a tear gas canister shot directly at him.
Others showed a Reuters reporter rubber bullets they said were fired by police.
Ibrahim Mattar, an official of the moderate Shia opposition group Wefaq, said two protesters had serious head wounds while dozens were taken away after inhaling tear gas.
Bahrain, home to the US Navy's Fifth Fleet, has been gripped by its worst unrest since the 1990s after protestors took to the streets last month, inspired by uprisings that toppled the leaders of Egypt and Tunisia.
The tiny kingdom has seen weeks of rallies by its Shia majority, which says it is discriminated against by the Sunni royal family.
The unrest is being closely watched in Saudi Arabia, where Shias make up 15% percent of the population.
Saudi Arabia, the world's top oil exporter has seen small protests in the Eastern Province, where its oil industry is based and which is home to most Shias in the conservative Sunni kingdom.
In a statement earlier in the day, the Interior Ministry urged all protestors to return to the Pearl roundabout for their own safety. It said the police had cleared protest tents from Bahrain Financial Harbour after one policeman was stabbed and another was taken to hospital with head wounds.
Thousands of Bahraini youths still occupy Pearl roundabout.
But the opposition appears increasingly split, between the mainstream, which wants peaceful rallies calling for a new government and constitutional reform, and smaller groups intent on bringing down the royal family with more provocative action.
'It was a mistake to go to the Financial Harbour. There is enough room in the square for protests,' said a moderate opposition activist who did not give his name. 'It was a small group and it's not popular, the consensus was on the square.'