Chatter vibration is one of the limiting factors in increasing the material removing rate in machining operations. In this paper, the integrated mechatronic modeling of a lathe machine equipped with MR damper, and design of a fuzzy semi-active controller are presented. To suppress chatter, the structural dynamic characteristics (i.e., real and imaginary part of the frequency response function), which are the main parameters in drawing the stability lobes, are varied semi-actively using magnetorheological damper . Modified Bouc-Wen model is employed for MR damper modeling, which enables us to account for the input voltage to the damper as the control input of the system. Since the structure becomes nonlinear in the presence of MR damper, a time-domain approach for generation of stability lobes is presented. In controller design and as a feedback of the chatter level, a novel chatter detection index (CDI) is developed, which can also be employed for experimental chatter detection. The obtained results show that the proposed system has been successful in enhancing the stability of the lathe machine.