In this paper, we introduce a generalization of Lyapunov’s direct method for dynamical systems with fractional damping. Hereto, we embed such systems within the fundamental theory of functional differential equations with infinite delay and use the associated stability concept and known theorems regarding Lyapunov functionals including a generalized invariance principle. The formulation of Lyapunov functionals in the case of fractional damping is derived from a mechanical interpretation of the fractional derivative in infinite state representation. The method is applied on a single degree-of-freedom oscillator first, and the developed Lyapunov functionals are subsequently generalized for the finite-dimensional case. This opens the way to a stability analysis of nonlinear (controlled) systems with fractional damping. An important result of the paper is the solution of a tracking control problem with fractional and nonlinear damping. For this problem, the classical concepts of convergence and incremental stability are generalized to systems with fractional-order derivatives of state variables. The application of the related method is illustrated on a fractionally damped two degree-of-freedom oscillator with regularized Coulomb friction and non-collocated control.