This paper presents the design, fabrication, and testing of a novel, one degree-of-freedom, magnetic resonance compatible smart hand interfaced rehabilitation device (MR_CHIROD v.2), which may be used in brain magnetic resonance (MR) imaging during handgrip rehabilitation. A key feature of the device is the use of electrorheological fluids (ERFs) to achieve computer controlled, variable, and tunable resistive force generation. The device consists of three major subsystems: 1) an ERF based resistive element, 2) handles, and c) two sensors, one optical encoder and one force sensor, to measure the patient induced motion and force. MR_CHIROD v.2 is designed to resist up to 50% of the maximum level of gripping force of a human hand and be controlled in real time. Our results demonstrate that the MR environment does not interfere with the performance of the MR_CHIROD v.2, and, reciprocally, its use does not cause fMR image artifacts. The results are encouraging in jointly using MR_CHIROD v.2 and brain MR imaging to study motor performance and assess rehabilitation after neurological injuries such as stroke.