Sheikh Isa Qassim, considered the community's spiritual leader, had abused his position to "serve foreign interests and promote... sectarianism and violence", the interior ministry said, quoted by the BNA state news agency.
Qassim had been a strong proponent of "absolute allegiance to the clergy", while maintaining continuous contact with "organisations and parties that are enemies of the kingdom", it charged.
The decision follows the suspension of Bahrain's main Shia opposition group, al-Wefaq, whose political chief Sheikh Ali Salman is serving a nine-year jail term on charge of inciting violence.
Home to the US Navy's Fifth Fleet, Bahrain has been shaken by unrest since security forces crushed 2011 protests demanding a constitutional monarchy and an elected prime minister.
Protesters still frequently clash with police in Shia villages outside the capital, with rights groups repeatedly raising concern over the response of the authorities.
Qassim allegedly worked on "controlling elections" by issuing fatwas, or religious edicts, either calling for or against voter participation, the interior ministry said.
It said his interventions "stretched to aspects of public life".
The ministry suggested that Qassim was not Bahraini in origin, without specifying when he acquired citizenship, while online sources say he was born in Diraz village, west of Manama in the 1940s.
He delivers the sermon at weekly Friday prayers in the mosque of Diraz, regularly criticising the government's crackdown on the opposition and protests.
Prime Minister Khalifa bin Salman al-Khalifa, addressing the council of ministers on Monday, warned that "there will be no place for those who incite violations of the law and who threaten the security of the country".
Bahraini authorities have revoked by court order the citizenships of scores of Shias convicted of violence.
But unlike earlier cases, the decision against Qassim was issued by the Gulf state's council of ministers and not by a court.