An iron oxide ferrofluid with mean particle size of 10.6 nm was synthesized by co-precipitation. The nanoparticles were characterized using X-ray diffraction, transmission electron microscopy, electron energy loss spectroscopy, and dynamic light scattering. The magnetorheological properties of ferrofluid were investigated using a rotating rheometer. The effect of magnetic field on the aggregation of magnetic nanoparticles and rheological behavior were investigated. Moreover the effects of concentration and particle size on the magnetoviscousity of ferrofluid were studied. The results showed that the maghemite is the major magnetic phase. The magnetoviscous effect leads to phase separation at high magnetic fields which is dependent to the concentration. It was shown that the smaller particle sizes which are not contributed in magnetoviscous effect can contribute at higher magnetic fields.