The two companies also signed an agreement for the potential supply of green steel produced in North America.
H2 Green Steel, whose first plant is under construction in northern Sweden, plans to use hydrogen made from renewable energy to produce steel instead of highly-polluting coal used in traditional steelmaking.
A preliminary accord with Mercedes-Benz "has now been further developed into a binding agreement covering volumes of about 50,000 tonnes per year, which will be produced in H2 Green Steel's green hydrogen-powered iron and steel plant in Boden in northern Sweden," the two companies said in a joint statement.
With around 900 kilos (1,985 pounds) of steel needed per car according to industry data, the contract would enable Mercedes-Benz to produce around 55,000 cars with a lower CO2 footprint.
Mercedes-Benz sold around two million vehicles last year.
No financial details of the deal were disclosed.
"A memorandum of understanding has also been signed for the potential supply of green steel produced in North America," the two companies said.
"We have talked to different stakeholders in both Canada and the US for some time," H2 Green Steel chief executive Henrik Henriksson said, providing no other details.
H2 Green Steel says its method reduces emissions by 95 percent, compared to traditional steel manufacturing.
The World Steel Association estimates the industry accounts for about seven to nine percent of man-made emissions worldwide, making it one of the most CO2-polluting heavy industries.
The biggest hurdle to full-scale production is access to electricity, especially that produced from renewable sources, according to experts.
One of H2 Green Steel's biggest investors is climate tech investment group Vargas, co-founder of Swedish electric battery group Northvolt.
H2 Green Steel has just received environmental approval for its plant in Boden, which is expected to begin production in 2025.
Using hydropower to produce hydrogen, it is expected to have a capacity of up to five million tonnes of steel per year, according to the company.
H2 Green Steel is one of several companies in the region investing in fossil-free steel.
Swedish steelmaker SSAB has teamed up with state-owned utility Vattenfall and mining company LKAB to build a pilot plant that already produces decarbonised steel using renewable hydrogen.
The consortium is to open a bigger plant in 2026.
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