The sit-in was called by al-Wefaq, Bahrain’s largest opposition political society, after a late Thursday raid on the home of Sheikh Isa Qassim.
Last week’s raid provoked anger in the Shia Muslim community.
Sheikh Qassim is the most senior Shia cleric in the Persian Gulf state. Bahrain has a majority Shia population but the ruling royal family is Wahabi Muslim.
Bahrain majority have long complained of discrimination and formed the largest group when thousands of pro-democracy protesters took over a prominent roundabout in the capital Manama in February 2011.
The protesters were cleared from the roundabout with force and in the ensuing unrest more than 50 people died, hundreds were jailed and thousands lost their jobs.
The government of King Hamad promised reforms in the wake of the violence but critics including Wefaq say that human rights violations and police brutality against protesters continue.
Jasim Husain, a senior al-Wefaq member, told the BBC that the raid on Sheikh Isa Qassim’s house had “deeply offended” the Shia community.
“He has a huge number of followers. People were shocked that security forces had raided the home of the most senior religious figure in the country at one o’clock in the morning.”
The sheikh was not present at the time of the raid. The security forces were said to have seized documents but no arrests were made.
Friday’s sit-in took place in Diraz near Sheikh Qassim’s mosque. An observer told the BBC that police had made no attempt to stop protesters entering the town.