A composite polyester and cotton yarn is formed by blending polyester fibers with cotton fibers which have been regenerated from waste cotton material such as trimmings and cuttings from the apparel manufacturing industry. The fibers are cleaned and blended, then carded to align the fibers into strands. Depending on the size and texture of the desired yarn, the fibers are stretched and drawn into slivers prior to spinning to join the fibers together. The polyester fibers are preferably recycled polyethylene terephthalate fibers which are up to three time longer than the regenerated cotton fibers, so that the polyethylene terephthalate fibers overlap and braid onto the regenerated cotton fibers during spinning. The resultant yarn is stronger and more absorbent than yarns made solely out of regenerated cotton fibers. The yarn is suitable for producing woven or knit fabric for the production of colorful and functional clothing and home textiles without the need for further bleaching or dyeing.