diff --git a/mercurial/localrepo.py b/mercurial/localrepo.py
--- a/mercurial/localrepo.py
+++ b/mercurial/localrepo.py
@@ -42,7 +42,7 @@ class localrepository(repo.repository):
         if not os.path.isdir(self.path):
             if create:
                 if not os.path.exists(path):
-                    os.mkdir(path)
+                    util.makedirs(path)
                 os.mkdir(self.path)
                 requirements = ["revlogv1"]
                 if self.ui.configbool('format', 'usestore', True):
diff --git a/tests/test-init b/tests/test-init
--- a/tests/test-init
+++ b/tests/test-init
@@ -84,3 +84,6 @@ for i in bundle file hg http https old-h
   test -d "$i" -a -d "$i/.hg" && echo "ok" || echo "failed"
 done
 
+echo "# creating 'local/sub/repo'"
+hg init local/sub/repo
+checknewrepo local/sub/repo
diff --git a/tests/test-init.out b/tests/test-init.out
--- a/tests/test-init.out
+++ b/tests/test-init.out
@@ -73,3 +73,9 @@ ok
 ok
 # hg init "with space"
 ok
+# creating 'local/sub/repo'
+store created
+00changelog.i created
+revlogv1
+store
+fncache