STOCKHOLM (Reuters) -H&M-backed textile recycling firm Syre will provide recycled polyester to U.S. retailers Gap and Target, it said on Tuesday, as demand for sustainable fashion grows.

Several startups are developing technologies to recycle discarded clothes into new textiles amid increasing consumer demand, and with retailers keen to burnish their sustainability credentials and meet tougher regulations.

Syre, which was co-founded by fast-fashion retailer H&M and investment group Vargas, plans to produce more than 3 million metric tons of polyester in 2032 by recycling used garments. It entered a long term agreement with H&M last year worth a total of $600 million over seven years.

Gap wanted to utilise 10,000 tons per year of its polyester chip, while Target would incorporate recycled polyester into a "selection" of the company's products, Syre said in a statement.

"We will co-develop circular polyester together and it will lead to a commercial agreement over time," Syre CEO Dennis Nobelius told Reuters. He did not disclose the potential monetary value of any agreement or a timeframe.

Syre produces a polyester chip which then needs to be spun into a thread by its partner companies.

"This partnership enables us to accelerate our progress toward realizing a more circular fashion industry," Gap's Vice President of Global Sustainability Dan Fibiger said in the joint statement.

Last year, Syre raised $100 million in a funding round to build a "blueprint" factory in the U.S. state of North Carolina and prepare for two more plants, including one in Vietnam.

The U.S. factory is expected to have a capacity of up to 10,000 tons of recycled polyester annually and become operational during 2026, while Syre aims to start construction on the Vietnam plant in 2027 to produce between 150,000 and 250,000 tons polyester, Nobelius said.

Sweden-based sportswear company Houdini has also committed to source 50% of its polyester from Syre for a three-year period, Syre said.