Improving the process of designing modern tools and devices for rehabilitation of both muscular and neural disabilities requires such intelligent systems that together with organizing intensive therapy could have an effective role in returning some of the patient's abilities and encourage them to complete the course of the training in order to get back to normal daily life. In this paper, first properties and laws governing the behavior of the electro-rheological fluid (ERF) as a smart material are briefly described. Then the principles of designing a two-degree-of-freedom intelligent damping system based on an electro-rheological fluid for the application in rehabilitation of human hands are explained. This mechanism provides the capability to create a virtual environment in which the training can be intelligently manipulated on the basis of body's feedback system. Also it can encourage the patient to continue with the therapy. Modeling and simulation of the electro-rheological (ER) force element is presented and results are compared with the available experimental data obtained, by other researchers, from a prototype system with relatively similar geometry but for other applications. Very good agreement is being noted between the theoretical model and the experimental data for different test configurations.