King Hamad bin Isa Al Khalifa issued a decree saying the political satire staged on Thursday by the leading Shia Muslim al-Wifaq Islamic Society, despite an official ban, was "within the spirit of the constitution", the dailies said.
Information Minister Nabil Yaqub al-Hamer had vowed to take al-Wifaq to court over the "illegal" play, forcing the group to cancel a second show.
The show, which drew a 3000-strong crowd, was rare in the conservative Gulf region, especially in Bahrain which has a history of tension between its Sunni Muslim rulers and Shia majority.
"For democracy to prevail in the kingdom, no one should be above judgment and criticism"
Al-Wefaq Islamic Society,
One scene in the play mocked the appointed upper house of parliament, showing it wasting time with a long poem praising a royal figure who walks in with his wife in ceremonial Arab garb followed by a long escort of guards.
Bahrain, a regional finance hub and the headquarters of the US Navy's Fifth Fleet, has taken steps towards political reforms since King Hamad came to power in 1999. But the monarch still has near absolute powers and remains above criticism.
Encouraged by the reforms, the opposition is now pushing for greater freedoms and democracy in the small island state.
Al-Wifaq welcomed the king's decree. "For democracy to prevail in the kingdom, no one should be above judgment and criticism," it said in a statement.