The mainly Shia Muslim demonstrators carried huge portraits of Iran's late revolutionary leader Ayat Allah Ruhollah Khomeini and his successor Ayat Allah Ali Khamani.
"Death to Bush, Death to Sharon," they chanted, referring to US President George Bush and Israeli Prime Minister Ariel Sharon.
The march, on Friday, passed peacefully through a wealthy suburb of the capital, Manama.
A US-backed peace "road map" envisaging establishment of a Palestinian state is all but dead after months of Israeli strikes against Palestinian targets in the West Bank and bomb attacks in carried out by Palestinian resistance groups.
Protesters, who see Israel as the unyielding guilty party in the stalemate, also set ablaze British flags to mark International Jerusalem Day, an Iranian-inspired event held each year on the last Friday of the holy fasting month of Ramadan to promote Palestinians' claim to Jerusalem.
Bahrain hosts the headquarters of the US Navy's Fifth Fleet and was formally designated by Bush last year a major non-NATO ally.