Fadel Salman Matrouk was shot dead in front of a hospital on Tuesday where mourners gathered for the funeral of Ali Msheymah who died of his wounds after police dispersed a protest in a village east of Manama the previous day.
Echoing slogans which have become popular across the Arab world following the uprisings in Egypt and Tunisia, mourners chanted "the people want to overthrow the regime."
The funeral of Matrouk, whose body was wrapped in a Bahraini flag, was taking place in the Manama suburb of Al-Mahuz.
Washington voiced concern at the violence in Bahrain, a staunch US ally, and called for restraint in a country ruled by the Sunni Al-Khalifa family with a Shiite majority that was the scene of deadly unrest in the 1990s.
"This is your only and last chance to change the regime," read a banner carried by protesters who descended on Manama's Pearl Roundabout late on Tuesday, shortly after the funeral of Msheymah.
Cyber activists outraged by the killing of the two protesters called for the Manama demonstration on Facebook.
On Wednesday, hundreds of demonstrators were still camped in Pearl Square, while thousands more were expected to arrive after the funeral.
"I slept here. I will sleep here today until our demands are met," said Hussein Attiyah, 29.
"Those include releasing all detainees, and the resignation of the prime minister," Sheikh Khalifa bin Salman al-Khalifa, King Hamad's uncle, widely despised by the opposition, who has been in office since 1971.
MPs from Bahrain's main Shiite opposition bloc have joined the protest movement.
Demonstrators want a "contractual constitution and a peaceful transfer of power," said MP Mohammed Mezaal of the Shiite opposition Islamic National Accord Association, whose 18 MPs walked out of the 40-member parliament.
Washington, which uses Bahrain as home base for its Fifth Fleet, said it was urging its allies in the Middle East to open up to their peoples' demands.
"We have sent a strong message to our allies in the region saying let's look at Egypt's example, as opposed to Iran's example," President Barack Obama said on Tuesday.
The protesters appeared unimpressed by King Hamad's televised address to the nation on Tuesday in which he expressed sorrow for the deaths and announced a ministerial investigation.
He also vowed to press on with a reform process that saw the restoration in 2002 of the parliament dissolved in 1975. "Reform is going ahead. It will not stop," the king said.
But the Shiite-led opposition has long complained that the elected chamber's legislative authority is shared with an appointed upper house.
Interior Minister Rashed bin Abdullah al-Khalifa also apologised for the killings, announcing that the policemen behind the two demonstrators' deaths have been taken into custody pending investigation.
And the interior ministry said it was allowing demonstrators to stay in Pearl Square "taking in consideration the feelings" of the people.
UN High Commissioner for Human Rights Navi Pillay accused the Bahraini authorities of having used "disproportionate force against peaceful protesters" and called for the release of demonstrators.
US State Department spokesman Philip Crowley also expressed concern.
But he welcomed Bahraini vows to probe the deaths and "take legal action against any unjustified use of force by Bahraini security forces," and urged all sides "to exercise restraint and refrain from violence."
Amnesty International's Middle East and North Africa director Malcolm Smart condemned the killings and called on the authorities to listen to the calls for change.
Formula One boss Bernie Ecclestone, meanwhile, voiced disquiet about next month's Bahrain Grand Prix, which opens the new Formula One season.
Ecclestone told London's Daily Telegraph newspaper it was too early to consider calling off next month's Bahrain Grand Prix but said he planned to contact Bahrain's Crown Prince Salman about the risk of protests.
"The danger is obvious, isn't it?" Ecclestone said