Bahrain has the smallest population of any Arab state, but its special problems single it out as a test case for peaceful reform in a region made more volatile by the uprisings in Egypt and Tunisia. As unrest in the small Gulf island kingdom entered its second day, the key question was whether calls for change would remain limited or enter a more radical stage. King Hamad's conciliatory tone suggested he recognises the gravity of the crisis.

Bahrain's distinction is that the Sunni Muslim Al Khalifa dynasty rules over a restive Shia majority that has long complained about poverty and discrimination for jobs and housing. The population has grown from 750,000 to more than a million in a few years, with Shias in senior jobs decreasing while large numbers of non-Bahraini Sunnis are naturalised.

This sectarian division puts Bahrain on a regional faultline, with an assertive Shia Iran glowering across the Gulf at a country that is also home to the US 5th fleet and a key ally for Washington. The Saudis, with their Shia majority in the oil-producing eastern provinces, are watching nervously.

Bahrain is the odd one out economically as well, lacking the hydrocarbon riches of Qatar or the UAE and thus the ability easily to buy off dissent in exchange for political quiescence.

It is not the first time riot police have fired teargas and rubber bullets at protesters, but anger and ambition have been fuelled by events in Egypt and Tunisia. Twitter and Facebook have been getting out the crowds.

Most Shia protesters insist they want a new constitution and respect for human rights, not revolution or regime change. The key event on Tuesday was the decision by the main Shia party, al-Wifaq, to suspend activities in the elected lower house of parliament, a fairly effective body even if the final say rests with the appointed upper house and the king.

Parliament's cross-sectarian attempts to investigate a high-level real-estate scandal involving the royal family caused nervousness last year. The prime minister, the king's uncle, has been in power for the entire 40 year-period since independence from Britain. Attention in recent months has focused on the detention and trial of 23 opposition activists who were rounded up during a crackdown last summer, as well as allegations they were tortured.

Anticipating trouble, the authorities have issued a flurry of pre-emptive announcements to try to defuse tensions. Expensive western PR firms are offering advice. Last week the government gave $2,660 to every family after earlier increasing food subsidies.

Overall, however, the view from abroad is positive. "King Hamad understands that Bahrain cannot prosper if he rules by repression," the US ambassador reported in December 2009 in a cable released by WikiLeaks. "Two election cycles have seen the integration of the Shia opposition into the political process. While a Shia rejectionist fringe continues to boycott the process, their influence remains limited as the mainstream Wifaq party has shown an ability to work with the government to achieve results for its constituents … So long as Wifaq remains convinced of the benefits of political participation, the long-term outlook for Bahrain's stability is good."