Bahrain's human rights record has come under increasing scrutiny over its handling of the unrest which broke out in early-2011, putting it in the frontline of the region-wide tussle between Shi'ite Muslim Iran and Sunni Arab states.
Bahraini officials welcomed the Arab ministerial council's decision as a recognition of its eligibility to host such an important institution.
Bahrain has always rejected claims it violates human rights.
The kingdom, ruled by the Sunni Muslim al Khalifa family and base for the US Navy's Fifth Fleet, was behind a proposal to create the Arab Human Rights Court.
But Bahrain's Shi'ite Islamic al Wefaq movement said Manama's hosting of the court casts doubt on the credibility of the tribunal.
The group said on its website: "There are more than 55 types of human rights violations perpetrated by the regime in Bahrain against citizens, including natural and fundamental human rights.
"This entrenches the idea of Bahrain being the human rights black hole."
A Human Rights Watch official also criticised the decision to base the court in Bahrain.