We present the quantum theory of a two-photon nonlinear laser when the lasing medium consists of long-lived atoms. There is no population inversion in this laser, but the system exhibits gain arising from the four-wave-mixing process in an active nonlinear medium. The strong phase correlation between the photons generated in four-wave mixing leads to a narrower than usual linewidth of the two-photon laser far above threshold. The laser output is also squeezed. Systems with a higher lifetime have the advantage of requiring a lower pump to reach the threshold of laser oscillation. We give explicit solutions for the noise spectrum of the intensity difference of the two output modes in the steady state and show that it is highly squeezed even for non-Markov systems. © 1994 The American Physical Society.