We experimentally investigate the mixing and demixing dynamics of Bose-Einstein condensates in the presence of a linear coupling between two internal states. The observed amplitude reduction of the Rabi oscillations can be understood as a result of demixing dynamics of dressed states as experimentally confirmed by reconstructing the spatial profile of dressed state amplitudes. The observations are in quantitative agreement with numerical integration of coupled Gross-Pitaevskii equations without free parameters, which also reveals the criticality of the dynamics on the symmetry of the system. Our observations demonstrate new possibilities for changing effective atomic interactions and studying critical phenomena.