EEG studies show that observing errors in one's own or others' actions triggers specific electro-cortical signatures in the onlooker's brain, but whether the brain error-monitoring system operates according to graded or discrete rules is still largely unknown. To explore this issue, we combined immersive virtual reality with EEG recording in participants who observed an avatar reaching-to-grasp a glass from a first-person perspective. The avatar could perform correct or erroneous actions. Erroneous grasps were defined as small or large depending on the magnitude of the trajectory deviation from the to-be-grasped glass. Results show that electro-cortical indices of error detection (indexed by ERN and mid-frontal theta oscillations), but not those of error awareness (indexed by error-Positivity), were gradually modulated by the magnitude of the observed errors. Moreover, the phase connectivity analysis revealed that enhancement of mid-frontal theta phase synchronization paralleled the magnitude of the observed error. Thus, theta oscillations represent an electro-cortical index of the degree of control exerted by mid-frontal regions whose activation depends on how much an observed action outcome results maladaptive for the onlooker. Our study provides novel neurophysiological evidence that the error monitoring system maps observed errors of different magnitude according to fine-grain, graded rather than all-or-none rules.