We prepared a new type of electrorheological particle composed of TiO2 nanocrystallites-coated montmorillonite (MMT/TiO2) nanocomposite by the sol-gel technique. The characterizations including TGA, XRD, TEM, SEM, EDS, and FTIR showed that TiO2 was deposited on the surface of the MMT flakes with anatase nanocrystallite. An obviously enhanced ER effect was found in the MMT/TiO2 nanocomposites based ER fluids compared with pure MMT and TiO2. Furthermore, the temperature and sedimentation stabilities of the MMT/TiO2 ER fluids had also been improved greatly. Interestingly, the content of TiO2 was demonstrated to have an important influence on the ER effect. When the content of TiO2 was about 20 wt%, the ER effect of MMT/TiO2 ER fluid reached its maximum, which was about 5 times that of pure MMT ER fluid and 27 times that of pure TiO2 ER fluid. Based on dielectric analysis, the significant ER enhancement by formation nanocrystallites-coated montmorillonite was attributed to the enhanced interfacial polarization in this nanocomposite particle due to the effective limitation of the long-range drift of active ions in montmorillonite particles.