"The rulers of Bahrain will from now on be partners to the crimes of the Zionist regime as a constant threat to the security of the region and the world of Islam," the foreign ministry said in a statement.
Iran accused its arch foe Israel of "decades of violence, slaughter, war, terror and bloodshed in oppressed Palestine and the region".
The Friday announcement by US President Donald Trump made Bahrain the second Arab country in a month, after the United Arab Emirates, to normalise ties with Israel under US sponsorship.
Iran's supreme leader Ayatollah Ali Khamenei said earlier this month that the UAE had "betrayed" the Muslim world and that he hoped they would "soon wake up and compensate for what they have done."
Iran's regional rival Saudi Arabia has made no comment on the Bahrain agreement and has held back from striking a similar deal of its own.
It has reiterated its longstanding position that Israel must first sign an internationally recognised peace accord with the Palestinians.
Iran said that through this "shameful" deal, Bahrain has "sacrificed the Palestinian cause at the altar of American elections".
Its "result will undoubtedly be growing anger and the lasting hatred of the oppressed people of Palestine, Muslims and the free nations of the world".
Before this year, Israel had been able to strike just two peace accords with Arab countries - Egypt in 1979 and Jordan in 1994 - and Trump is hoping that the diplomatic successes will give him badly needed momentum going into the November 3 presidential election.
Bahrain, alongside the UAE, downgraded its relations with Iran in 2016 amid rising tensions between Saudi Arabia and the Islamic republic.
The Sunni-ruled kingdom has faced long-running unrest among its large Shiite community that it has consistently blamed on Iran.
Tehran-Riyadh relations deteriorated further last year following a series of attacks on tankers in the Gulf, which Washington blamed on Tehran despite Iranian denials.
Saudi Arabia and Iran take opposing sides in regional conflicts from Syria to Yemen.
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