King Hamad bin Isa al-Khalifa on Friday replaced Shaikh Muhammad bin Khalifa al-Khalifa with another member of the royal family, Rashid bin Abd Allah bin Ahmad al-Khalifa, the official news agency said.
"We share the anger of our people over the oppression and aggression taking place in Palestine and in the holy shrines (in Iraq). People had a right to peaceful protests. We are
investigating," the agency quoted the king as saying.
Police earlier clashed with thousands of angry demonstrators in the capital Manama. More than 20 people were hurt, including Jawad Firuz, a Shia opposition activist and member of Manama city council.
"He received a rubber bullet in the head and is now in hospital undergoing an operation," his brother Jalal Firuz said. "Many women and children fainted from inhaling gas. This is completely unjustified. It was a peaceful rally."
The police action came two days after the king held a rare meeting with dissident leaders and ordered the release of a group of political prisoners to end growing tension between the Shia-led opposition and the Sunni Muslim minority ruling Bahrain.
Violence broke out on Friday after police fired tear gas to disperse thousands of mainly Shia Muslim demonstrators demanding the withdrawal of US forces from the southern Iraqi cities of Najaf and Karbala.
One police car was set on fire.
"Death to America ... death to Israel," chanted the protesters in the pro-Western Gulf Arab state, home to the US Navy's Fifth Fleet.
Marchers carried portraits of Iraq's top Shia religious leader, Grand Ayat Allah Ali al-Sistani, and some demonstrators wore white shrouds to indicate their willingness to die to defend the shia holy sites.
"America must leave our holy shrines ... This is a red line they cannot cross. They are playing with fire," said a banner carried by the demonstrators.
US-led forces have been battling followers of the Shia leader Muqtada al-Sadr in and around the two Iraqi cities.
Al-Sistani has called on both sides to withdraw their forces.