DUBAI (Reuters) - A Bahrain court on Sunday dissolved the main Shi'ite Muslim opposition group al-Wefaq, accusing it of helping to foster violence and terrorism, in an escalation of a crackdown on dissent in the U.S.-allied Gulf kingdom.

The official Bahrain News Agency (BNA) said the court ruled that Wefaq had taken aim at "respect for the rule of law and the foundations of citizenship based on coexistence, tolerance and respect for others; provided an atmosphere for the incubation of terrorism, extremism and violence and for foreign interference in national affairs."

Its funds would be claimed by the state treasury, BNA said.

Bahrain, which hosts the U.S. Fifth Fleet, has a Shi'ite majority but a Sunni Muslim-led government, mainly drawn from the ruling al-Khalifa family. Seen by other Sunni-ruled Gulf kingdoms like Saudi Arabia as a bulwark against Iranian influence, it put down Arab Spring protests in 2011.

It drew U.S. and U.N. criticism in June when it moved to strip a top Shi'ite cleric's citizenship and announced it was suspending Wefaq and closing its offices.

Close ally Britain expressed deep concern at Sunday's ruling. In a statement, Foreign Secretary Boris Johnson urged Bahrain to guarantee political freedoms for all its citizens.

He called for a dialogue among all sides to "promote social cohesion and inclusivity, including political representation, for all Bahrainis. I understand there is a right of appeal."

A U.S.-based rights group said the latest ruling had left no outlet for peaceful grievances in the island monarchy.

"Today’s decision is a dangerous mistake, leaving no real outlet for peaceful grievance," said Brian Dooley of Human Rights First. "The kingdom's government has told its people that from now on not only are you not allowed rights, you're not allowed to complain about it."

"DANGEROUS MISTAKE"

Bahraini Shi'ites complain of discrimination by the government. Since the authorities crushed street protests in 2011, demonstrators have clashed frequently with security forces, who have been targeted by several bomb attacks.

Bahraini authorities deny any discrimination. Bahrain has accused the opposition of undermining security and blamed the bombings on Iran and Lebanon's armed Shi'ite group Hezbollah. Iran and Hezbollah deny any involvement in Bahrain's unrest.

Dooley said U.S. President Barack Obama should respond swiftly by reimposing a ban on U.S. arms transfers to Bahrain’s military that the U.S. State Department imposed after the 20011 crackdown but lifted a year ago.

A State Department report delivered to Congress in June found Bahrain's national reconciliation efforts since 2011 had stalled, and it had not implemented recommendations to protect free expression.

(Reporting by Katie Paul; Editing by William Maclean and Mark Trevelyan)