We study the long-range interaction of a single ion with a highly excited ultracold Rydberg atom and report on the direct observation of an ion-induced Rydberg excitation blockade mediated over tens of micrometer distances. Our hybrid ion-atom system is directly produced from an ultracold atomic ensemble via near-threshold photoionization of a single Rydberg excitation, employing a two-photon scheme that is specifically suited for generating a very low-energy ion. The ion's motion is precisely controlled by small electric fields, which allows us to analyze the blockade mechanism for a range of principal quantum numbers. Finally, we explore the capability of the ion as a high-sensitivity, single-atom-based electric field sensor. The observed ion-Rydberg-atom interaction is of current interest for entanglement generation or studies of ultracold chemistry in hybrid ion-atom systems.