We study a generic open quantum system where the coupling between the system and its environment is of an energy-preserving quantum nondemolition (QND) type. We obtain the general master equation for the evolution of such a system under the influence of a squeezed thermal bath of harmonic oscillators. From the master equation it can be seen explicitly that the process involves decoherence or dephasing without any dissipation of energy. We work out the decoherence-causing term in the high- and zero-temperature limits and check that they match with known results for the case of a thermal bath. The decay of the coherence is quantified as well by the dynamics of the linear entropy of the system under various environmental conditions. We make a comparison of the quantum statistical properties between QND and dissipative types of evolution using a two-level atomic system and a harmonic oscillator. © 2007 IOP Publishing Ltd.