Parametric interaction of a pair of cavity fields in a near-resonantly driven atomic system is described by a bilinear Hamiltonian that decouples from atomic flip operators and is proportional to the population difference between dressed states. For proper choice of parameters, the parametric interaction is enhanced by at least two orders compared to the dispersively dressed cases. Although spontaneous emission is fed into the cavity fields, destructive interference occurs in the fluctuations of a pair of collective modes. As a result of the two factors, perfect squeezing and Einstein–Podolsky–Rosen entanglement in the output occur when the cavity relaxation rates are much larger than in the dispersive case. The mechanism is applicable to a great variety of multilevel systems and has experimental advantages in the cavity QED generation of squeezed and entangled states of light.