Bahraini security forces have opened fire on anti-government protesters, witnesses and opposition activists say.
The protesters were fired on after they had gathered in the capital Manama from the funerals of demonstrators killed in a security crackdown earlier this week.
Witnesses said the army fired live rounds and tear gas, and officials said at least 120 people had been hurt.
In an attempt to defuse the crisis, King Hamad promised a national dialogue "with all parties".
An official statement said that Crown Prince Sheikh Salman bin Hamad al-Khalifa had been given "all the powers to fulfil the hopes and aspirations of all gracious citizens from all sections".
The prince, who is also deputy supreme commander of the army, earlier called for everyone to withdraw from the streets.
Many of the protesters in Manama are calling for the overthrow of the royal family.
Meanwhile, US President Barack Obama said he was deeply concerned about reports of violence in Bahrain, Libya and Yemen.
"The United States condemns the use of violence by governments against peaceful protesters in those countries and wherever else it may occur," he said.
In a separate development, the United Kingdom said it had decided to revoke some of its arms export licences to Bahrain in light of the current situation there.
The BBC's Caroline Hawley, in Manama, says the funeral procession of one of the dead protesters turned into another anti-government demonstration.
The mourners were trying to make their way to the Salmaniya Hospital, where their injured colleagues are being treated.
But they came under fire as they passed close to Pearl Square, which has been sealed off by the army for the past day to prevent further large-scale demonstrations.
An eyewitness told al-Jazeera TV that the authorities gave no warning.
"They just started shooting us. Now there is more than 20 injured in the hospital. One guy has already passed away because he got shot in his head," said the witness.
One protester, 27-year-old bank clerk Ali al-Haji, told AP news agency that live ammunition was used.
"People started running in all directions and bullets were flying, I saw people getting shot in the legs, chest and one man was bleeding from his head," he said.
AP earlier reported that soldiers had fired anti-aircraft guns over the heads of the protesters.
Medical officials told the BBC that more than 120 people had been admitted to hospital after the clashes, many suffering the effects of tear gas, some with broken bones and one person who had been shot in the leg.
Bahrain is ruled by a royal family and a Sunni Muslim elite, but has a Shia majority who make up the bulk of the protesters.
Earlier, the country's most senior Shia cleric Sheikh Issa Qassem described attacks on protesters as a "massacre" and said the government had shut the door to dialogue.
As he spoke at emotionally charged Friday prayers in the Duraz neighbourhood, supporters shouted "victory for Islam", "death for Al Khalifa [the ruling family]" and "we are your soldiers".
Western countries have urged Bahrain to show restraint in dealing with protesters and called for meaningful reform in the small Gulf state kingdom.
The UN's rights chief Navi Pillay condemned the use of force by governments across the region, and singled out the Bahraini authorities for targeting medical workers while they were treating protesters.
"The nature and scope of the human rights violations taking place in several countries in the region in response to those who are largely demonstrating peacefully for their fundamental human rights and freedoms is alarming," she said.
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.
Washington is watching with growing concern as unrest and violence spread across the Middle East, threatening its regional interests, correspondents say.
While Bahrain is tiny, with a population of less than one million, it is home to the US Navy's Fifth Fleet and is near another key US ally in the region, Saudi Arabia.