Building on recent developments in dynamic density functional theory, we have developed a version of the theory that includes hydrodynamic interactions. This is achieved by combining the continuity and momentum equations eliminating velocity fields, so the resulting model equation contains only terms related to the fluid density and its time and spatial derivatives. The new model satisfies simultaneously continuity and momentum equations under the assumptions of constant dynamic or kinematic viscosity and small velocities and/or density gradients. We present applications of the theory to spinodal decomposition of subcritical temperatures for one-dimensional and three-dimensional density perturbations for both a van der Waals fluid and for a lattice gas model in mean field theory. In the latter case, the theory provides a hydrodynamic extension to the recently studied dynamic mean field theory. We find that the theory correctly describes the transition from diffusive phase separation at short times to hydrodynamic behaviour at long times.