I have a mat sandpaper stain on my varnished hardwood floor. What is the best way to fix it? Polishing and varnishing a small aerea where it is or using some type of repair product?

Image: https://ibb.co/ZmyLXSj

Is this the result of sun fading the floor?

No, it was a varnish accumulated that was removed with a stiletto and sandpaper above the dried varnish.

Most varnishes have some color although they are classified as "clear". You could try to apply the same varnish to the area where it was sanded off, blending the coat or coats onto the surface with edges of boards or grain pattern so the patch doesn't stand out. The whole room will need to be coated to have an even gloss level at the end of the repair. Traffic over the floor usually polishes the satin agent off so the floor is shiny in a traffic pattern, before it has worn through.