The streets of Bahrain's capital, Manama, have again erupted in violence as the kingdom's besieged monarch declared martial law and ordered troops - including Saudi forces - to take all measures to quell a festering rebellion.

The clashes had been anticipated since more than 1,000 troops from Saudi Arabia and other Gulf states arrived in Bahrain on Sunday, after being invited by the ruling dynasty to help restore order.

Demonstrators and security forces faced off from mid-morning in the Sitra area on the outskirts of Manama. Bystanders reported the sound of gunfire and the scent of teargas by early afternoon, followed by the familiar cacophony of ambulance sirens as they sped casualties towards the city's two main hospitals.

By late afternoon, there were numerous reports of clashes inside Shia villages throughout Manama that had led to dozens of injuries.

At least nine people were admitted to hospital with moderate to serious injuries. Hospital officials reported that two victims had what appeared to be gunshot wounds. Many more appeared to be unconscious as they were wheeled into wards amid chaotic scenes.

The Bahrain government denied a claim from Riyadh that one of the troops it deployed on Sunday night had been killed by protesters. An ambulance arrived at SMC hospital with penetrating damage from what seemed to be a large projectile.

Diplomatic tensions also intensified with Bahrain recalling its ambassador to Tehran, following the Iranian foreign minister Ali Akbar's warning on Monday that Bahrain's rulers and the Gulf states who have sent troops to the kingdom needed to act with "wisdom and caution".

A standoff also appears to be worsening between the two key regional protagonists - Saudi Arabia and Iran - both of whom have accused each other of using the Arab world's smallest state as an arena for their broader agendas.

The latest events seem to mark a new phase in the crisis that has paralysed the tiny kingdom since January. Demonstrators have drawn strength from the revolutions in Tunisia and Egypt that saw autocratic regimes toppled by popular protests. However, unlike in either place, Bahrain's protests have taken on a strong sectarian dimension.

The ruling minority is almost exclusively Sunni, while the majority of the population is Shia. The latter feels disenfranchised and disadvantaged by an establishment which it claims does not represent its interests.

Protesters were on Tuesday afternoon on the move towards the Saudi embassy to express their anger at the involvement of Saudi troops, who they see as buttressing the regime from legitimate political pressure.

The US government has stood behind the 200-year-old kingdom, which allows it to maintain its Fifth fleet naval base in Bahrain's port and is considered to be pro-western.