We describe the creation of localized density perturbations, or ion holes, in an ultracold neutral plasma in the hydrodynamic regime, and show that the holes propagate at the local ion acoustic wave speed. We also observe the process of hole splitting, which results from the formation of a density depletion initially at rest in the plasma. One-dimensional, two-fluid hydrodynamic simulations describe the results well. Measurements of the ion velocity distribution also show the effects of the ion hole and confirm the hydrodynamic conditions in the plasma.