This is an extra-super-incomplete work in progress test alpha beta etc. version. That said, it works.
***Requires SKSE version 1.6.5, available at http://skse.silverlock.org

Here's what you get with version 0.1 here:
-Armor has a small chance to lose a smithing level when you take damage. Because there's no locational damage, the armor piece is chosen randomly.
-Shield has a small chance to lose a smithing level when you block an attack.
-Skills for the correct armor type (or blocking) reduce this chance.

By small chance, I mean that at 0 skill you have a 1% chance for armor to take damage from a normal attack. 1.5% for a power attack, and 0.5% if you get shield bashed.
At 100 skill with the appropriate armor type, the chances are 0.5/0.75/0.25%
At 100 Blocking skill, the chances are 0.34/0.51/0.17% to take shield damage.
This means that on average (with a 50 skill character) you'll be taking damage to armor about every 150th time you get hit.

Issues:
1. Any item that takes damage will fall off your favorites list. Unfortunately there doesn't seem to be any way to alter an item's health from script without dropping it from the inventory. Probably doesn't matter with armor, but it might be annoying with a shield. And I disabled degradation of blocking weapons for this reason.
2. Won't work if you're carrying duplicates of a piece of armor you have equipped. I know how to fix this and will for the next version.
3. The chances are largely untested. I've been testing the mod the entire time I was working on it (this evening) but I haven't actually sat down and played the game normally with it yet. It may be horribly balanced (too much armor damage, too little) so please post feedback.
4. I left in one bit of "debug" output, which is a passive note in the upper left that you have picked up an item when the armor is damaged. For the moment this seemed like the most basic way to let the player know that one of their armor pieces has been damaged, since it says something like: "Ebony Shield (Fine) Added", letting you know that your shield has degraded to "Fine" quality.

Plans:
-FIx issue 2 above. Easy enough fix, I just wanted to get this on the forum before I quit working on it for the day.
-Adjust the values above based on playtester suggestions (and my own playtesting). They may be horribly unbalanced one way or the other (too much damage, or not enough). Definitely looking for feedback on this.
-Implement a menu that allows the user to select the degradation rate settings themselves so I don't have to create multiple versions of the script.
-Adjust chances based on weapon type vs armor type. My idea here is that cutting weapons are more likely to damage light armor (mostly leather-based) and bashing weapons are more likely to damage heavy armor (if plate armor is deformed it's far less effective). Also looking for feedback here.
-Degrade weapon when used to block. Easy to implement, but I removed this because having your weapon go off the favorites list is extremely annoying. May release extra download that has this enabled if it's wanted.
-Implement weapon degradation. Nearly identical script methods will work, however in order to make this happen I need a script with the OnHit event on literally every NPC in the world. A job for SkyProc, maybe? Still going to be annoying when it pulls your weapons off the favorites list, but might be worth it for those who really want this feature.

I'm going to upload some alternative versions with different damage chances. For now, here's the normal version described above:
https://dl.dropbox.com/u/45455626/ArmDeg_Normal.zip