Security forces with tanks have overrun a square in the centre of Bahrain's capital Manama where anti-government protesters have been camped for weeks.
At least three civilians were reportedly killed after police fired on mainly Shia protesters. Officials said three police also died.
Troops have taken over a hospital treating the wounded. Officials have imposed a curfew and banned protests.
The country's Sunni rulers on Tuesday called in Saudi troops to keep order.
US Secretary of State Hillary Clinton said she was alarmed by developments in Bahrain.
"We deplore the use of force against demonstrators, and we deplore the use of force by demonstrators. We want a peaceful resolution," she said in an interview with the BBC in Cairo.
America's top diplomat stressed that the US had made it clear to officials in Bahrain that "we think they're on the wrong track", urging the "highest levels of the government" to resume a political dialogue.
Bahrain's health minister, himself a Shia, has resigned in protest against the government's use of force, and the BBC's Caroline Hawley in Manama says Shia judges have resigned en masse.
Bahrain - which has a population of 800,000 and is home to the US Navy's Fifth Fleet - is the first Gulf country to be thrown into turmoil by the wave of unrest sweeping the Arab world. Protests there began last month.
In other developments:
- The largest Shia opposition group, Wefaq, has urged followers to avoid confrontation with authorities, and said it had not organised any protests, Reuters news agency reports
- Senior Bahrain opposition MP Abdul Jalil Khalil, quoted by Reuters, described the crackdown as a "war of annihilation"
- President Mahmoud Ahmadinejad of Iran, the major Shia power in the region, said the crackdown was unjustifiable and irreparable, and blamed the US
- The country's stock market said it had closed until further notice. Two of Bahrain's main banks - Standard Chartered and HSBC Holdings - said they had closed all their branches
It is not clear whether soldiers from other Gulf states are taking part in the crackdown, but there are indications that the Saudi troops are being kept in reserve.
After security forces moved in on Wednesday, plumes of black smoke rose as tents burned in Pearl Square, the centre of the protests.
There was a call for further protests mid-afternoon. But shortly afterwards a military officer announced a 1600 (1300 GMT) - 0400 curfew live on TV, to start just a half hour later, and there were no reports of further demonstrations.
The crackdown comes a day after King Hamad Bin Isa al-Khalifa declared a three-month state of emergency. At least two people died in clashes on Tuesday and more than 200 were injured.
On Wednesday, protesters had set up barricades in the square but they were no match for the military, our correspondent says.
An eyewitness, Dalal, told the BBC that police were firing rubber bullets at tents in the square, and set fire to cooking oil.
"People began retreating," she said. "When the police saw that we were moving they ran towards us."
The security forces then moved into Manama's financial district, reopening roads which had been blocked by protesters.
Sources at the Salmaniya hospital said it had been surrounded by troops, and no-one was being allowed in or out. The wounded are now reportedly being treated in mosques or at home.
A doctor there told the BBC that she and her colleagues were hiding from troops who had taken over the building and were shooting at people inside the hospital, threatening the doctors with live ammunition.
"They are all around Salmaniya medical complex with their guns and they are shooting anybody," she said.
Meanwhile a surgeon told the BBC's Bill Law that he had been called to a private hospital to operate on a man with gunshot wounds but was forced to turn back.
He said government claims that protesters were not being denied treatment were false.
"I am terrified," he added. "This is a genocide directed against the Shia."
Human rights groups said live rounds had been used in some parts of the city.
There are reports of dozens injured but our correspondent says it is difficult to get any sense of casualty numbers.
Seven people had been killed during a month of protests prior to Tuesday's clashes.
The Shia majority complain of economic hardship, lack of political freedom and discrimination in jobs in favour of Sunnis.
The king has reshuffled his cabinet but has not replaced the prime minister of more than 40 years, Sheikh Khalifah ibn Salman al-Khalifah.
The protesters were inspired by the recent uprisings in Tunisia and Egypt, whose long-serving presidents were forced from power after weeks of demonstrations.