The BBC's Ian Pannell said Pearl Square, which had formed the centre of the protests, was now occupied by the police
Hundreds of riot police using tear gas and batons moved into the square before dawn on Thursday. At least two people died in the police operation, according to the opposition, while 100 sustained injuries.
The protesters are calling for wide-ranging political reforms and had been camped out since Tuesday.
Clashes earlier in the week left two dead and dozens injured in the country.
The unrest comes amid a wave of protests that has swept through several Arab nations, with the presidents of Tunisia and Egypt forced to resign.
Tear gas Ibrahim Sharif, of the secular Waad party, told the BBC that the police had acted without any warning at about 0300 (2400 GMT).
At the scene 
The streets are now very quiet, there are rumours of some form of curfew - there is an almost complete absence of traffic and the large presence of police and military vehicles would possibly suggest that is the case. At a large shopping centre in the centre of Manama, the car park has been taken over by the military and they are using it as a command and control facility.
I don't think anybody knows what happens next in this protest. The authorities were trying to minimise what was taking place - saying it was only 1,000-2,000 people, it was not a threat and the situation in their country was different from other Middle Eastern states - it was more democratic. But the response that has taken place overnight would indicate that they were deeply worried by the scene of tens of thousands of people gathered, it must be said, peacefully in the centre of town.
This is a country that has very close ties to the UK and US. It would seem impossible that the Bahrain authorities cannot now come out and try to explain why they have acted in this way.
I don't think anybody knows what happens next in this protest. The authorities were trying to minimise what was taking place - saying it was only 1,000-2,000 people, it was not a threat and the situation in their country was different from other Middle Eastern states - it was more democratic. But the response that has taken place overnight would indicate that they were deeply worried by the scene of tens of thousands of people gathered, it must be said, peacefully in the centre of town.
This is a country that has very close ties to the UK and US. It would seem impossible that the Bahrain authorities cannot now come out and try to explain why they have acted in this way.
"Throughout the day there were rumours that we would have another 24 hours, but the attack has come without warning.
"You have hundreds of women and children already camping there. People are sleeping in the tents [...] there is a dense fog of tear gas, these people could be trapped there and inhaling this tear gas," he said.
He said that he had seen at least 100 riot police on one side of the square and hundreds of people running away from the square down the side roads.
"We have two confirmed dead - one 65-year-old and another younger person, a third is in critical condition," he said, adding that ambulances with injured people were arriving almost every minute at Manama's main hospital, Salmaniya.
Some children, he said, had become separated from their parents as police stormed the square.
The Agence France-Presse news agency quoted an opposition MP as saying that two more protesters had died from their wounds but this has not been independently confirmed.
Abdul Jalil Khalil, from the opposition Wefaq party, told Reuters: "This is real terrorism. Whoever took the decision to attack the protest was aiming to kill."
One Bahrain resident, Ali, who went to the hospital to donate blood, told the BBC: "Lots of people are standing at the gates of the hospital. They came to donate blood. The police has closed the area so that no people can get in or out - some tried to get out and were shot at by police.
"There are many tanks and helicopters hovering around."
Protesters' demands Ahead of the storming of the square the US had expressed concern at the violence and called for restraint and respect for the "universal rights of its citizens" and "their right to protest". Bahrain is a key US ally, hosting the US Navy's Fifth Fleet.
On Wednesday, White House spokesman Jay Carney said the US was "watching events from Bahrain and around the region very closely".
"The security forces evacuated Pearl Square [...] after having exhausted all chance of dialogue," interior ministry spokesman Gen Tarek al-Hassan said, in a statement from the official news agency BNA quoted by AFP.
He said that as some "refused to submit to the law" they had to intervene to disperse them.
The disturbances in Bahrain - where the Shia Muslim majority has been ruled by a Sunni Muslim royal family since the 18th Century - are part of a wave of anti-government unrest that has swept the Middle East.
The BBC's Ian Pannell in Bahrain said that the brutal response of the authorities makes it clear that the ruling family saw this as a threat to its grip on power.
- political prisoners to be released
- more jobs and housing
- the creation of a more representative and empowered parliament
- a new constitution written by the people
- a new cabinet that does not include Prime Minister Sheikh Khalifa Bin Salman Al Khalifa, who has been in office for 40 years
Opposition boycott Since independence from the UK in 1971, tensions between the Sunni elite and the less affluent Shia have frequently caused civil unrest. Shia groups say they are marginalised, subject to unfair laws, and repressed.
He also began a cautious process of democratic reform. In 2001, voters approved a National Action Charter that would transform Bahrain into a constitutional monarchy. The next year, Sheikh Hamad proclaimed himself king and decreed that a National Assembly be formed.
There was also greater protection of democracy and human rights. Although political parties were banned, "political societies" could operate.
Landmark elections were held in 2002, but the opposition boycotted them because the appointed upper chamber of parliament, the Shura Council, was given equal powers to the elected lower chamber, the Council of Representatives.