A differential assembly includes a case, a gearset having a pair of pinion gears and a pair of side gears, and an electrically operable coupling including a magnetically responsive fluid. The coupling is operable to selectively interconnect one of the side gears to the case. In one instance, the present invention includes a rotor having a plurality of outwardly extending blades positioned in communication with a magneto-rheological fluid. An electromagnet is selectively actuated to change the viscosity of the magneto-rheological fluid. In this manner, the differential may function as an “open” differential, a “locked” differential or a differential accommodating a limited-slip condition.