Officers fired tear gas and shotguns at demonstrators during the assault in Diraz on Tuesday, and there were a number of injuries, AP reported.
The Interior Ministry said the operation targeting the town, home to Sheikh Isa Qassim and a long-running sit-in supporting him, was to "maintain security and public order".
It called the area a "haven for wanted fugitives from justice".
Activists shared photographs and videos showing youths throwing stones and climbing on an armored personnel carrier.
Gunfire could be heard in one video as white smoke from tear gas hung in the air. Another video showed a bulldozer smashing through the area that once hosted the sit-in.
Police arrested 286 people inside of Sheikh Qassim's home, the Interior Ministry said.
Amnesty International later said the prominent cleric was not arrested. Reports suggest that he is now under house arrest.
At least five protesters were killed, activists and police said. Activists shared images of other protesters suffering what appeared to be birdshot wounds.
The raid followed a court decision on Sunday giving Sheikh Qassim a year's suspended prison sentence and seizing assets belonging to him and his ministry. Two of his aides received similar sentences.
Police have besieged Diraz for months, tightly controlling access. The sheikh could be deported at any time after authorities stripped him of his citizenship last June over accusations that he fueled extremism.
His supporters deny the allegations and called his trial politically motivated.
Bahrain, a close ally of the US in the Persian Gulf region, has been witnessing almost daily protests against the ruling Al Khalifa dynasty since early 2011, with Manama using heavy-handed measures in an attempt to crush the demonstrations.
Scores of Bahrainis have been killed and hundreds of others injured and arrested in the ongoing crackdown on the peaceful demonstrations.