Why do I get the "uninitialized error" for $key?

My guess is your input file has a blank line:

while (<FILE>) {
    next if /^\s*#/ ; # skip comments
    next unless /\S/; # skip blank lines
    chomp;
    my ($key, $value) = split;
    $hosts{$key} = $value;
    }
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See perlre