When Vaczi had a T-shirt decorated with the embroidery two years ago for her boyfriend Ervin Nagy, a well-known Hungarian actor, it sparked intense interest in her company, Matyo Design. Urban hipsters now readily fork out $45 for a Matyo T-shirt.

After opening a showroom in Budapest earlier this year, Vaczi now hopes to build a fashion design business on the ruins of Hungary's communist-era textile factories.

"We'd like to create a company that sells internationally," said Vaczi, earning a global "place in fashion design" in a first for a Hungarian firm.

Around emerging Europe, where garment assembly for Western brands has been a thriving business for years, there is a new confidence that local designs also have a chance on the world stage.

With wages still low compared to other regions, including Asia where costs have ballooned, retailers are moving business back to eastern Europe, meaning a big influx of orders and a new investment in infrastructure, fashion company executives said.

Local manufacturers are also helped by the potential for expansion in domestic markets such as Poland and Russia which, though huge, are a lot less saturated than in the West.

"I think that clothing companies from (central Europe) have big growth potential," said Kamil Szlaga, a retail analyst at KBC Securities in Warsaw. "The region still has room to catch up with western Europe... Surely, Russia is their key target."

Polish fashion companies like LPP LPPP.WA, the creator of the brand Reserved, have grown rapidly and in some markets even taken on giants like Spain's Inditex (ITX.MC), the world's top fashion retailer and parent of Zara.

"In Russia, Inditex has more shops but we're following them quite well," LPP Deputy Chief Executive Dariusz Pachla told Reuters. The company has opened 100 shops there so far "and we plan to open a lot more".

LPP nearly doubled its annual profit in 2011, recording a net income of 269 million zlotys. Like many others in the region, the company has focused its efforts on eastern Europe, mainly Russia.

"The East has been our target for years," Pachla said. "Russia is developing very quickly."

WESTERN SUCCESS AND WHAT IT TAKES

Joanna Przetakiewicz, a Polish designer and protégé of fashion legend Karl Lagerfeld, plans to open outlets for her La Mania line in Russia, China and Japan after the prestigious UK department store Harrods began selling the label in July.

Harrods' head of womenswear Helen David told Reuters La Mania was one of many interesting new labels to come out of eastern Europe lately.

"Eastern European designers are creating increasingly considered and innovative designs," David said. "The region is a wonderful new hotbed of emerging fashion talent and we are thrilled to have La Mania in store as a representation of this."

Przetakiewicz, who also has plans to launch La Mania at the Milan department store Excelsior, said western buyers have become more welcoming to emerging European designers.

"I must say that an overall climate, not only in the fashion industry, is changing positively," she told Reuters. "Poles are becoming more recognisable and popular, particularly in the UK."

NOT JUST CONSUMERS, BUT BANKERS TOO

The positive trend can be seen not just at the consumer end, but also when it comes to raising funds.

The designs of Hungarian Szandra Sandor, who splashes folk art-inspired patterns on finely cut clothes under the label Nanushka, have been featured in international fashion magazines and sold widely in the United States, Europe and Japan.

Sales, 80 percent of which go overseas, grew quickly to reach about $500,000 in 2011.

But when the orders came too quickly to fill, Nanushka was compelled to seek partners. Despite a general reluctance to finance fashion companies by banks squeezed by the financial crisis, venture capital group PortfoLion stepped in.

Bolstered by PortfoLion's one million euros investment, plus a one million euro loan, Nanushka now aims for annual sales of about $5-7 million within five years.

"Every family business gets to this special point, where it's grow or die," Sandor told Reuters in her newly refurbished downtown shop in Budapest's glitzy Fashion Street.

PortfoLion said Nanushka's attraction was its global focus.

"We only invest in companies which are already capable to expand in foreign markets," PortfoLion chief Peter Oszko, a former finance minister, told Reuters. "Nanushka ... only needed capital to take advantage of their opportunities."

Rebekah Schindler, Nanushka's U.S. agent at Showroom Seven in New York, said the capital injection was essential to conquering the U.S. market, especially large department stores where the ability to produce in quantity and be flexible are a must.

"It (Nanushka) has been around for a few years but it always hit a glass ceiling as far as sales go," she said. "I think that this angel investment can really contribute to it growing exponentially in the next year."

BETTER FACILITIES, INFRASTRUCTURE

As designers like Nanushka expand from cottage businesses to larger-scale operations, they need reliable production facilities and better infrastructure, which is where the return of the bigger international fashion houses come in.

As a growing number of these companies bring production closer to their markets from traditional assembly areas such as China, where costs have risen, and North Africa, which has been hit by turmoil in recent years, the eastern fringes of Europe are looking more and more attractive with their relatively low wages and stability.

"Now we see European companies returning to Europe," said Daniel Csereklyei, who runs a garment assembly operation in Hungary called Kezmu, employing 5,000 people. "We have worked for high-end brands who have stayed nearer, but now second-tier labels return too, creating even more demand."

He said orders are pouring in from big fashion houses, including familiar luxury names, but asked that the labels not be identified to protect client confidentiality.

Building on the ramped-up production capability, Csereklyei has also ventured into the creative side of the business, teaming up with designer Kati Zoob to roll out a new brand called Attitude.

Attitude is geared toward the well-heeled, older customer, said Zoob, 54, in her store in a Budapest shopping centre. But unlike her younger competitors, she does not plan to expand into foreign markets immediately.

"You don't have to be world famous right away," she said. (Additional reporting by Antonella Ciancio; Editing by Sonya Hepinstall)

• A Permanent Economic Emergency