The decree affecting its National Security Agency comes as Bahrain is in the midst of a renewed clampdown on dissent. It also follows an armed assault on a prison that killed a police officer and freed 10 inmates.
The decision came in decree, announced by the state-run Bahrain News Agency. It described the decision as making the arrest powers "limited" to terrorism cases, though it was in fact restoring them.
However, terrorism allegations have been levied against activists and protesters in the past. Bahrain's government did not immediately respond to questions from The Associated Press about the decision.
Activists immediately warned the move would create an environment that allows security service abuses to flourish.
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"Today's decision makes it clear that Bahrain has turned its back unapologetically against human rights," said Husain Abdulla, the executive director of Americans for Democracy & Human Rights in Bahrain.
Limiting the agency's powers was a main recommendation made by the Bahrain Independent Commission of Inquiry, which investigated the 2011 protests and subsequent crackdown.
Another royal decree after the protests stripped the agency of its arrest powers.
The commission linked the agency to the systematic torture and raids conducted after the protests, which saw the island's Shiite majority and others demand more political freedom from the country's Sunni rulers. Troops from Saudi Arabia and the United Arab Emirates ultimately helped put down the protests.
On Sunday, gunmen armed with automatic rifles and pistols stormed Bahrain's Jaw prison, killing a police officer and freeing 10 inmates convicted on terrorism charges.
In the time since, police have stepped up checkpoints and patrols, but have yet to announce the recapture any of those who escaped.
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