The retrial will take place in a civil court. A military court sentenced Abdulhadi al-Khawaja to life in prison for plotting against the state last June.
Abdulhadi al-Khawaja began a hunger strike some three months ago. His case has become a rallying point for other activists.
Twenty other activists will also face retrials, the court ruled.
Seven of them have been tried in absentia.
“The court is [ordering] that the trial take place again and that testimony from prosecution and defense witnesses be heard once more as if it is a new trial,” the official news agency BNA was quoted as saying.
A crowd of opposition supporters chanted outside the courthouse in the capital Manama after the verdict was announced.
This is only a limited victory for Abdulhadi al-Khawaja and his team, our correspondent says.
It means the ruling by the military court has been thrown out – but he will remain in custody while his case is reviewed.
“I think it is ridiculous, what sort of legal process is this?” said Abdulhadi al-Khawaja’s wife Khadija al-Moussawi.
“They are playing for time, and should have transferred his case to a civilian court at the first hearing not the third.”
“Just let them go. The government commissioned the Bassiouni report and that declared that they were prisoners of conscience,” she said, referring to an independent inquiry into events in 2011 that delivered a searing indictment of the government, including its treatment of Khawaja.
“They must be freed.”
Abdulhadi al-Khawaja has dual nationality with Denmark, and the Danish ambassador criticized the decision to keep him in custody and renewed his call for Khawaja to be transferred to Denmark on humanitarian grounds.
Abdulhadi al-Khawaja remains in hospital in a serious condition, having lost 25% of his bodyweight during his campaign.
“I saw him on Sunday,” Khadija Moussawi said.
“He is very weak. He had been restrained and force-fed through a tube for five days, but agreed to be fed by IV. He will decide today, what course to take. “
The hospital denies Abdulhadi al-Khawaja has been force-fed, saying he gave written permission to be fed via a naso-gastric tube.
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