Sheikh Isa Qassim accused of fomenting "extremist" sectarian atmosphere, a week after suspension of Al-Wefaq group.
Bahrain has stripped a leading Shia spiritual leader of his Bahraini nationality following a request from the interior ministry.
The Bahrain News Agency quoted the interior ministry on Monday as saying that Sheikh Isa Qassim had played a key role in creating an "extremist" sectarian atmosphere and working to divide the society.
After the decision was announced, several hundred Qassim supporters gathered outside of his house in the mostly Shia village of Diraz, carrying posters and chanting religious slogans.
Sayed al-Wadaei, director of advocacy at the Bahrain Institute for Rights and Democracy, said in a statement that the decision will escalate tensions and may lead to violence.
However, Saudi Arabia's senior council of religious leaders, who follow a conservative Sunni ideology that is at odds with Iran's Shia leadership, welcomed the actions taken by Bahrain.
Bahrain's interior ministry quickly issued a warning against attempts to create what it called "security disturbances".
An interior ministry statement said Qassim had endorsed "the theory of theocracy" and had used his sermons to serve foreign interests, an apparent reference to Iran.
It said Qassim had harmed the supreme interests of the country in doing so.
A broadly worded article of the law in Bahrain allows the government to strip citizens of their nationality if "the person causes harm to the security of the state".
Qassim is the latest Bahraini Shia to lose his nationality in Bahrain. Rights groups say at least five were deported in recent months after having their citizenship stripped.
Recently the country's largest Shia opposition group, Al-Wefaq, was suspended and Sheikh Ali Salman, its secretary general, sentenced to nine years prison.
Also, last week Bahrain's authorities detained Nabeel Rajab, a rights activist, on charges related to this criticism of the government.
Bahrain has been in turmoil since a 2011 uprising backed by majority Shia Muslims demanding greater rights from the Sunni-led monarchy.
The government crushed the protests with the help of its Sunni Arab Gulf allies suspicious of Iran and opposed to growing Shia influence in the region.
Bahrain hosts the US Navy's 5th Fleet.
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