I'd model it with a disease track (rusting track?) for equipment:
Metallic Weapon
Normal <->
Pitted (-1 to attack rolls, damage die reduced one step*) <->
Corroded (-2 to attack rolls, damage die reduced two steps*) <->
Crumbling (-3 to attack rolls, damage die reduced three steps*, final stage)
Metallic Armor
Normal <->
Pitted (armor bonus reduced by 2) <->
Corroded (armor bonus reduced by 4) <->
Crumbling (armor bonus reduced by 6, final stage)
For simplicity, you can assume that shields are non-metallic, or you could add the following tracks if the PCs are using metallic shields:
Metallic Heavy Shield
Normal <->
Corroded (shield bonus to AC and Reflex Defence reduced to 1) <->
Crumbling (shield bonus to AC and Reflex Defence reduced to 0, final stage)
Metallic Light Shield
Normal <->
Crumbling (shield bonus to AC and Reflex Defence reduced to 0, final stage)
Make it a magical Rusting Curse, and have it maintained or improved by Arcana (Maintain DC 15, Improve DC 20). Once it reaches the final stage, only the Make Whole ritual can restore the item. Note that since the Rusting Curse only affects metallic items, light armor (cloth, leather and hide) should be unaffected.
On every successful attack by the rust monster, if the target is wielding a metallic weapon or wearing metallic armor, one metallic item (rust monster's choice if there is more than one) is affected by the Rusting Curse. If the item is magical, the target may make a saving throw with the item's enhancement bonus as a bonus to the saving throw to avoid the Rusting Curse. If the item is already affected by the Rusting Curse, its condition worsens by one step.
* To avoid vorpal weapon cheese, vorpal weapons take a cumulative -1 penalty to damage rolls instead.