We present a new numerical scheme for the simulation of deformable objects immersed in a viscous incompressible fluid. The two-dimensional Navier-Stokes equations are discretized with an efficient Fourier pseudo-spectral scheme. Using the volume penalization method arbitrary inflow conditions can be enforced, together with the no-slip conditions at the boundary of the immersed flexible object. With respect to Kolomenskiy and Schneider (2009) [1], where rigid moving obstacles have been considered, the present work extends the volume penalization method to account for moving deformable objects while avoiding numerical oscillations in the hydrodynamic forces. For the solid part, a simple and accurate one-dimensional model, the non-linear beam equation, is employed. The coupling between the fluid and solid parts is realized with a fast explicit staggered scheme. The method is applied to the fluttering instability of a slender structure immersed in a free stream. This coupled non-linear system can enter three distinct states: stability of the initial condition or maintenance of an either periodic or chaotic fluttering motion. We present a detailed parameter study for different Reynolds numbers and reduced free-stream velocities. The dynamics of the transition from a periodic to a chaotic state is investigated. The results are compared with those obtained by an inviscid vortex shedding method [2] and by a viscous linear stability analysis [3], yielding for both satisfactory agreement. New results concerning the transition to chaos are presented.