Iron graphite (FeGr) composite is a potential design material for machine tools to increase vibration damping without additional energy. Previous studies focused on the isolated composite’s properties rather than their damping effect as a passive damper to assembled components. There is currently no effective model using real mode superposition (RMS) method for demonstrating the damping behavior of FeGr composites in a multi-material structure. This paper presents a local damping description for a finite element model with RMS assuming constant loss factor for all modes to simulate the damping behavior of FeGr composites and their contribution to system damping and a test rig to identify the model parameters for typical machine tool boundary conditions. The influence of FeGr spacers with 0, 20%, 40%, and 60% graphite content on eigenfrequency and on damping of the test rig was measured, and the results were used to identify the damping model. The agreement of eigenfrequencies and damping ratio between measurement and simulation proves the effectiveness of the parameterized damping model predicting the mode-dependent damping behavior of FeGr in machine tool joints. The material analysis indicates that increasing the graphite content of FeGr composites from 0 to 60% amplifies the system damping from 0.03% to 0.6% at first bending mode. The interface pressure in a tightly fastened FeGr joint affects the system damping significantly. When designing machine tools, the surface condition of FeGr composite cannot be overlooked. FeGr dominates system damping and shows better damping performance at high vibration amplitudes.