The ministry of information affairs said it had decided to bar the publication and stop its circulation "until further notice", according BNA state news agency, without specifying if the ban affects the electronic edition.
The order was due to Al-Wasat's "violation of the law and repeatedly publishing what sows division in the society and affects Bahrain's relations with other states," BNA said.
The decision came after the paper published an article on Sunday that was "offensive to a sisterly Arab state," BNA said, in an apparent reference to an article that praised protests in Morocco.
The London-based Bahrain Institute for Rights and Democracy criticised the decision, saying it was "the latest in an escalated crackdown on independent civil society".
"They are trying to silence the only independent paper," BIRD's advocacy chief Sayed Ahmed Alwadaei said in a statement.
"Bahrain feels it can get away with any action because its key international allies the US and UK have shown they don't prioritise human rights. This attack on the press must be condemned by London and Washington," he added.
BIRD said an unnamed source at the newspaper said Al-Wasat was suspended due to the publication of an "opinion article" about widespread protests in Morocco.
Demonstrations and a strike have rocked the northern port of Al-Hoceima, in Morocco's neglected Rif region, where authorities arrested the leader of a popular protest movement and others on May 26.
The protesters have been demanding more development and railing against corruption, repression and unemployment.
Al-Hoceima has been shaken by social unrest since the death in October of a fishmonger who was crushed in a rubbish truck as he protested against the seizure of swordfish caught out of season.
Authorities intensify crackdown
Authorities in Bahrain had suspended the electronic edition of Al-Wasat for few days in January over accusations of sowing sedition and harming national unity.
The newspaper was also suspended for two days in August 2015 on similar charges.
Bahrain has been rocked by sporadic unrest since March 2011 when security forces brutally crushed an Arab Spring-inspired uprising.
At the height of the 2011 uprising, Al-Wasat was suspended and its chief editor Mansoor al-Jamri tried and fined for publishing false information.
The latest ban comes as authorities intensify a crackdown on the opposition, with police shooting dead five demonstrators last month as security forces dismantled a months-long sit-in.
And last week a Bahrain court dissolved the secular opposition party Waed, months after the main party representing the kingdom's Shiite majority, Al-Wefaq, was also banned.
Tiny but strategic Bahrain, which lies just across the Gulf from Iran, is a key regional ally of the United States and home to its Fifth Fleet.
It has come under frequent criticism from international human rights groups and the administration of Barack Obama often criticised the Manama authorities for not doing more to reconcile with the opposition.
However President Donald Trump made a clear break from that policy during a visit to the region earlier this month, telling Bahrain's King Hamad in neighbouring Saudi Arabia "there won't be strain with this administration".
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