The better lifestyles and socioeconomic status of today’s customers have led to massive growth in the use of textile items. Additionally, that can end up being the main reason for the disposal of textile products, which would add to the global environmental burden. In order to lessen the environmental impact of textile waste, it is essential to create a novel and innovative strategy. However, one could lessen the earth’s textile load by adopting a circular economy strategy. Therefore, this study investigated the environmentally friendly method for the development of knitted fabrics from recycled cotton. Further, this study establishes the influence of yarn linear density and increased usage of recycled cotton on the properties of yarns and functional properties of rib-knitted fabrics. The results confirm that the presence of recycled cotton has a negative effect on yarn properties, especially fine yarns. The fabrics prepared with virgin-recycled cotton mix perform no better than their virgin cotton counterparts in terms of mechanical properties and absorption ability, but significant improvement in the performance and properties of the fabrics can be achieved by controlling the yarn tex and the proportion of the recycled component in the mix. These properties make recycled fibre fabrics suitable for various applications where both yarn and fabric strength are less crucial.