This paper presents the development of a variable-damping controller for a prosthetic knee using a simulated biped in a virtual environment before real tests are conducted on humans. The simulated biped incorporates several features of human walking, such as functional morphology, exploitation of inherent dynamics, hierarchical control network, combination of feed-forward and feedback controllers and phase-dependent modulation. Based on this virtual model of human walking, we have studied biomechanical aspects of the knee joint during walking. Observing the damping profile developed by the simulated biped throughout a gait cycle, we designed a controller for the knee joint. This controller has been evaluated on a modified version of the simulated biped, in which the model of a real prosthetic leg was incorporated. Results of such experiments for walking on flat and rough terrains have provided satisfactory outputs, including improved robustness.